In various Seeking Alpha articles and many highly acclaimed investing books, I have noticed a common theme: Invest in what you know. The products you use every day, the fashion trends that sweep the nation, or that latest tech gadget that you just had to purchase. So the last time I was out and about in the city I thought to myself: What do I see? What is every one buzzing about? What I saw pleasantly surprised me. Instead of the latest here-today-gone-tomorrow trends that can be devastating for the long-term prospects of companies, I saw people flocking to two well-established companies that have a track record for returning value to shareholders. With a bit of research, I determined that these companies might be profitable investments not only for me, but also for millions of young investors with long-term investment horizons.
Winter Apparel Is Just the Tip of the Iceberg
Looking around, I saw The North Face products everywhere. The North Face coats, hats, fleeces, backpacks, even shoes and boots. The North Face is owned by the VF Corporation (VFC), which is the world's largest publicly traded supplier of apparel. VF Corp. has 35 apparel and footwear brands that include: Lee, Wrangler, The North Face, Nautica, Timberland, Jansport, Vans, and Reef. The company has raised its dividend for 40 consecutive years; a very impressive feat considering it has also grown earnings 8.5% annually for the past 10 years. The yield is currently 2.4%, and the dividend has increased at a 12.5% annual rate over the past 5 years. With a payout ratio of 38.6% and management's strong commitment to raising the dividend, there is plenty of room for continued dividend growth.
VF Corp. is dedicated to improving shareholder value through organic growth as well as acquiring companies that will fit into their already vast and diverse portfolio. They currently have a bid in to acquire Australian action sports company, Billabong, which would be a nice addition to VF's fast growing outdoor and action sports division. The outdoors and action sports division achieved record revenue growth of 29% in 3Q 2012, with much of the growth coming from the newly acquired Timberland brand. Recently management announced that it wants to create $1.1 billion in additional revenue in the Asia Pacific region by promoting and aggressively marketing its top five brands including: Lee, The North Face, and Timberland. In China alone the number of vendors carrying VF products is expected to increase from about 2,300 to 6,000 in the next five years.
Short-term concerns with slowing sales in Europe and discouraging department store numbers can be offset by the impressive growth of the Vans brand and a more favorable European exchange rate. The long-term outlook is bright, with Value Line estimating 18% annual earnings growth and 14% per year dividend growth for the next 5 years.
Living in a major city, it feels as if there is a Starbucks (SBUX) on every corner. Whenever I walk by or stop into one of their stores, it is always crowded and buzzing with activity. Starbucks is the leading retailer of specialty coffee in the world and has a strong balance sheet, as well as solid fundamentals that will appeal to long-term investors.
Starbucks prides itself on making premium coffee and creating a strong customer base that will drive future sales. After Hurricane Sandy when the majority of Manhattan was shut down, people mobbed the only open Starbucks in the city at the Marriott Marquis. Some patrons walked as far as 20 blocks in flooded streets to get a cup of Starbucks coffee. This illustrates the strong brand loyalty and customer base that Starbucks has created. Growth rates for the past ten years have been impressive with sales rising 17.5% per year and earnings rising 21% per year. Results from the most recent quarter confirmed robust growth with 7% year-over-year sales growth in the Americas and 11% growth in the China/Asia Pacific region. CEO Howard Schultz pointed out that nearly 1 in 10 adults in the U.S. received a Starbucks gift card during the 2012 holiday season, calling it "the most gifted item of the season."
The coffee chain continues to expand its single-serve brewing business with the aggressive growth of its Verismo single cup brewing system, which is a direct competitor of Green Mountain Coffee's (GMCR) Keurig machine. The recent acquisition of tea maker Teavana has catapulted Starbucks into the $40 billion global tea market that has plenty of room for further growth. It will continue to expand physical Teavana locations as well as integrate the brand into Starbucks coffee shops. Starbucks is also testing the sale of beer and wine in select markets and may consider a widespread rollout if tests are successful. This would provide a boost to margins and increase traffic to locations in the evenings.
Starbucks started paying a dividend in 2010 and has already more than doubled its initial payout of $0.10 per share to $0.21 per share in a little over two years. With its current yield of 1.50% it may not be considered an income stock, but its strong earnings percentages and relatively low 39.0% payout ratio leave room for significant dividend growth. The stock is currently trading at a P/E of 30, which is higher than many of its peers in the restaurant industry, but I believe this premium valuation can be justified by its strong customer base and growth prospects.
VF Corp. and Starbucks will continue to grow and return value to shareholders with strong dividend growth and the potential for significant share price appreciation. While I think the entry price is important when buying any stock, the growth prospects of these two companies allow one to consider paying a current premium for the potential of significant long-term gains. Starbucks will continue to open new locations globally and enjoy unique, premium pricing power. VF Corp. will look to intensify its marketing strategy of its largest brands in key areas, and explore acquisitions that will add value to its already diverse portfolio. So just look around and see everyone wearing North Face jackets and drinking a Starbucks latte and smile knowing that these crowd-pleasers are here to stay for the long haul.
Disclaimer: By no means am I saying these stocks are right for everyone, but they are worth a look for long-term investors that are seeking established companies with strong growth prospects in earnings as well as dividends. As always it is important for each investor to do his/her due diligence and determine if these companies fit their investing strategies and goals.