I’ve never made the allure of the S&P 500 (SPY) a major holding because I prefer to invest in companies that generate more meaningful income.Despite the recent downturn, the S&P 500 remains yields a paltry 1.5%. This means that even if retirees accumulate a sizable retirement balance of $2 million, they will only receive $30,000 per year from the index fund. This is not enough to meet the daily living expenses in today’s world.
Which brings me to VF Corporation (NYSE: VFC), an S&P Dividend Aristocrat now trading at previously unimaginable prices. This article highlights why VFCs are a premium income right now, so let’s get started.
Why choose VFC?
VF Corp. is a global leader in branded lifestyle apparel, footwear and accessories with 40,000 employees worldwide and $11.8B in annual sales. VFC’s product offering spans multiple channels, including retail, wholesale and e-commerce. The company’s portfolio of iconic lifestyle brands includes Vans, The North Face and Timberland, which together account for 80% of its sales.
Despite the challenging operating environment, VFC reassured some doubts that revenue for the fiscal fourth quarter (ended April 2, 2022) rose 9% year over year (12% in constant currency) to $12.8 billion. This was driven by encouraging results from VFC’s The North Face brand (27% of total sales), which achieved an impressive 24% sales growth in the quarter (26% constant currency). ), achieving 32% sales growth for the full year of fiscal 2022. Notably, The North Face’s gross margins are now above pre-pandemic levels, supported by aggressive operating leverage.
In addition, VFC demonstrated strong margins through strong pricing power, with adjusted operating margin increasing 510 basis points to 13.1% for the full year of fiscal 2022. As shown below, VFC’s profitability score is A-, with a net profit margin of 11.7%, well above the industry median of 6.7%.
VFC’s shareholder returns are also noteworthy, returning $1.1B to shareholders in FY22 alone through $773 million in cash dividends and $350 million in share repurchases. After raising its dividend for 48 consecutive years, VFC is becoming the king of dividends. Recent price weakness has pushed the yield to 4.2%, with a safe 64% payout ratio for the dividend, while maintaining an A-rated balance sheet. As the chart below shows, VFC’s dividend yield is now near its highest level in over a decade.
Risks to the paper include the possibility of a recession, which could lead to a pullback in consumer spending. In addition, weakness in consumer spending in China due to the shutdown is likely to carry over into the current quarter. This was reflected in a drop in Vans sales in the region in the most recent quarter.
Going forward, management appears confident in FY23 as it has guided for 7% revenue growth in constant dollars, driven primarily by its larger brands and emerging brands, such as Icebreaker, which in FY22 generating record revenue, as well as Smartwool, which saw a 40% increase in sales last year. VFC is also adapting to changing consumer preferences through its omnichannel strategy, as noted in a recent conference call:
We continue to invest in enhancing the consumer omnichannel experience, adding intelligence to the way we collect, connect, manage and manage consumer profiles across channels, providing dynamic segmentation capabilities for all direct-to-consumer channels and marketing solutions for brands Serve.
This allows us to deliver a truly seamless omnichannel experience that enables brands to build stronger connections and personalize the way we communicate with consumers, resulting in increased satisfaction, engagement and conversion rates. Our one-click delivery time in the US is further reduced to just over 2 business days. Going forward, investment transformation will continue to be a key strategic priority.
I think VFC is currently trading at $47.32 with a forward P/E ratio of just 13.9, well below the normal P/E ratio of 22.2 over the past decade. Sell-side analysts’ consensus Buy rating has an average price target of $59, and Morningstar’s fair value estimate is $68, implying a potential one-year total return of 29-48%.
VFC is a quality company in a long-term position. It has a strong brand, a diversified portfolio and a solid balance sheet. It also returns cash to shareholders through dividends and share buybacks, and is becoming the king of dividends. The recent sell-off provides an attractive entry point for long-term value investors.