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According to a press release on July 22, 2010 related to the Q2 2010 earnings of the company, VF Corporation (NYSE:VFC) expects record EPS for the fiscal year 2010 and the company has an EPS guidance of $6.10 for the full year 2010. We take this opportunity to analyze the past of VFC in order to figure where the value of the stock could be in 2020.

VFC is an apparel company based in the United States. The company designs and manufactures or sources from independent contractors a variety of apparel and footwear for all ages.

At $78.92, VFC is trading at 17.49% from its all time high of $95.65 reached on July 17, 2007. An investor who invests in VFC should be comfortable with volatility comparable to the volatility of the market. The volatility of VFC is measured by its beta ratio of 0.98, which signifies that the stock has a theoretical volatility approximately equal to the market.

We compared the return of VFC with the market (NYSEARCA:SPY) from the years 1994 to 2010 YTD (as of September 20). All paid dividends are included in the return.

Civil year

VF Corporation (VFC)

Market (SPY)

1994

11.46%

0.33%

1995

14.57%

37.71%

1996

34.10%

22.35%

1997

42.86%

33.35%

1998

4.43%

28.49%

1999

-32.68%

20.32%

2000

25.02%

-9.70%

2001

10.21%

-11.78%

2002

-5.10%

-21.54%

2003

22.75%

27.88%

2004

30.50%

10.54%

2005

1.91%

4.70%

2006

51.83%

15.61%

2007

-13.63%

5.16%

2008

-16.84%

-36.38%

2009

38.05%

26.05%

2010 (as of September 20)

10.21%

3.92%

An investment made in VFC on December 31, 1993 had a return of 401.58% on September 20, 2010, while an investment in the market (SPY), for that same period, had a return of 209.37%. If we look at the last 10 years, an investment made in VFC on December 31, 1999 had a return of 221.68% on September 20, 2010, while an investment in the market (SPY), for that same period, had a return of -7.39%. All paid dividends are included in these returns.

As you can see, over the 17 periods observed, VFC outperformed the market 11 times. We can consider VFC as a volatile stock considering that over a period of approximately 17 civil years, the differences between the returns of each year have been important. For example, the 3 best returns per year have been of 51.83%, 42.86% and 38.05% and the 3 worst years of return have been of -32.68%, -16.84% and -13.63%. However, those kinds of returns per year are not unusual for a stock with volatility approximately equal to the market. The worst return of the market has been -36.38% in 2008 and its best was 37.71% in 1995, during the period 1994-2010 YTD by civil years.

Let’s have a look at the past EPS, dividend per share and payout ratio of VFC in the first table and at the EPS and dividend growth in the second one. (All amounts are split adjusted for the 2-for1 stock split of November 25, 1997)

Year

Diluted EPS

Dividend per share

Payout

1991

$1.31

$0.51

38.93%

1992

$1.93

$0.555

28.76%

1993

$1.86

$0.61

32.80%

1994

$2.05

$0.65

31.71%

1995

$1.19

$0.69

57.98%

1996

$2.28

$0.73

32.02%

1997

$2.70

$0.77

28.52%

1998

$3.10

$0.81

26.13%

1999

$2.99

$0.85

28.43%

2000

$2.21

$0.89

40.27%

2001

$1.19

$0.93

78.15%

2002

$-1.38

$0.97

N/A

2003

$3.61

$1.01

27.98%

2004

$4.21

$1.05

24.94%

2005

$4.44

$1.10

24.77%

2006

$4.72

$1.94

41.10%

2007

$5.22

$2.23

42.72%

2008

$5.42

$2.33

42.99%

2009

$4.13

$2.37

57.38%

2010

$6.10 (estimated)

$2.42 (estimated)

47.90% (NYSE:TTM)

Year

Diluted EPS growth

Dividend growth

1991 to 1992

47.33%

8.82%

1992 to 1993

-3.63%

9.91%

1993 to 1994

10.22%

6.56%

1994 to 1995

-41.95%

6.15%

1995 to 1996

91.60%

5.80%

1996 to 1997

18.42%

5.48%

1997 to 1998

14.81%

5.19%

1998 to 1999

-3.55%

4.94%

1999 to 2000

-26.09%

4.71%

2000 to 2001

-46.15%

4.49%

2001 to 2002

-215.97%

4.30%

2002 to 2003

N/A

4.12%

2003 to 2004

16.62%

3.96%

2004 to 2005

5.46%

4.76%

2005 to 2006

6.31%

76.36%

2006 to 2007

10.59%

14.95%

2007 to 2008

3.83%

4.48%

2008 to 2009

-23.80%

1.72%

2009 to 2010

47.70% (estimated)

2.11% (estimated)

The 2010 estimated EPS of $6.10 reflects the guidance of the company for the full year. The 2010 estimated dividend per share of $2.42 reflects 3 quarterly dividends already paid of $0.60 each plus an upcoming estimated dividend of $0.62 in December 2010. Usually, the company raises its dividend for the last payment of dividend of the year (4th of 4). The next quarterly dividend of $0.62 is purely hypothetical and remains conservative in terms of rise (rise of 0.02$ from previous quarter of $0.60). We prefer to stay conservative over a short period because in December 2009, the company increased the quarterly dividend by $0.01. ($0.60 from $0.59 for the previous quarter). Also, in December 2008, the company increased the quarterly dividend by $0.01. (0.59$ from $0.58 for the previous quarter).

From 1996 to 2010 (2010 estimated), the compound annual growth rate was 8.43% for the company’s EPS. If we take 1991 as a starting year, the company increased its dividend each year since 1991. The compound annual growth rate of dividend of VFC has been 8.90% from 1991 to 2009. However, that rise wasn’t necessarily made with a similar growth rate each year. From 1991 to 2005, the average was 5.66% per year, and then from 2005 to 2006, an important rise of 76.36% has been done. And finally, over a shorter period, the company is more conservative with its dividend increase, what matches with the recession of 2008-2009 and the actual economic climate. Overall, the compound annual growth rate of dividend of 8.90% from 1991 to 2009 is excellent for an investor.

The average payout ratio for the years 1991 to 2010 has been 38.60%. With an annual dividend of $2.40, a TTM EPS of $4.99, a payout ratio of 47.90%, which should reduce in the range of 40% at the end of 2010 if the company meets its guidance of EPS of $6.10, directly on the average for 20 years, the company has flexibility to increase the dividend and this one is safe. The current yield of VFC is 3.04% while the current yield of the market (SPY) is 1.93%.

As investors, it’s important to select companies with rising dividends and rising EPS to profit from a rising share price. Moreover, it’s important to select companies that increase their sales year over year to ensure their long term potential growth. Here are the VF Corporation’s sales by year from 1991 to 2009. We have also included 2010 TTM.

Year

Sales

1991

$2,952,433,000

1992

$3,824,449,000

1993

$4,320,404,000

1994

$4,971,713,000

1995

$5,062,300,000

1996

$5,137,180,000

1997

$5,222,250,000

1998

$5,478,800,000

1999

$5,551,610,000

2000

$5,747,870,000

2001

$5,518,800,000

2002

$5,083,520,000

2003

$5,207,450,000

2004

$6,054,530,000

2005

$6,502,370,000

2006

$6,215,790,000

2007

$7,219,350,000

2008

$7,642,600,000

2009

$7,220,280,000

2010 TTM

$7,353,158,000

The compound annual growth rate of sales of VFC has been 5.09% over the period 1991-2009. Over the same period, the growth rates of the EPS and the dividend of VFC have been superior to the growth rate of the sales. What is important is we can clearly see an uptrend in the company’s sales on a long period.

Here are the company’s balance sheets for the fiscal year 1992, 2000 and 2010 MRQ.

Balance Sheet

FY 1992 (As of January 2, 1993)

FY 2000 (As of December 30, 2000)

2010 MRQ (As of July 3)

Total Assets

$2,712,380,000

$4,358,156,000

$6,321,442,000

Total Liabilities

$1,546,891,000

$2,125,826,000

$2,682,204,000

Shareholders’ Equity

$1,165,489,000

$2,232,330,000

$3,639,238,000

Over that long period, the company had created wealth for its shareholders. We can see this by the increase of the shareholders’ equity of the company. From $1.2B in 1992, the shareholders’ equity was $3.6B in 2010 MRQ. The total assets of the company also increased from $2.7B in 1992 to $6.3B in 2010 MRQ. Here too we can clearly see an uptrend in the company’s total assets and shareholders’ equity on a long period. Of course, these values are book values but we prefer rising assets and shareholders’ equity over a long period rather than a stagnant Balance Sheet.

Let’s have a look at the historic P/E of VFC.

Year

P/E at year-end

1991

12.45

1992

11.62

1993

10.72

1994

10.53

1995

20.20

1996

13.82

1997

16.38

1998

14.64

1999

9.93

2000

16.40

2001

32.78

2002

N/A

2003

11.98

2004

13.15

2005

12.46

2006

17.39

2007

13.15

2008

10.11

2009

17.73

2010 YTD

15.82 (TTM P/E)

The current TTM P/E of VFC is 15.82. Over the period 1991-2010 YTD, we have 19 periods of P/E with an average of 14.80. We can clearly see over the period that the P/E of VFC is constant around the average without too much spreading. The actual TTM P/E is slightly above the average of 14.80. If the stock remains at its current price of $78.92 until the end of 2010, beginning of 2011, and if the company meets its guidance of EPS of $6.10, the P/E would be 12.94, below the average.

For the measure of the profitability, VFC has a TTM profit margin of 7.57%. The TTM operating margin is 11.54%.

For the measure of the financial strength, the MRQ current ratio is 2.33 for VFC, which is excellent. The company has a debt/equity ratio (MRQ) of 0.32, which is also excellent.

By comparison, Polo Ralph Lauren Corporation (NYSE:RL), a company with a similar Market Capitalization as VFC ($8.5B for VFC and $8.6B for RL), the TTM profit margin and TTM operating margin of RL are respectively 10.25% and 14.96%. The MRQ current ratio and MRQ debt/equity ratio are 2.83 and 0.09 respectively for RL.

The better way to predict the future is to look at the past; this is why we analyzed the past of VFC. Now, we are going to look at what would be the return in 2020 of an investment in VFC made today.

Our first scenario is a more conservative one. We previously saw that from 1991 to 2010 (2010 estimated), the compound annual growth rate was 8.43% for the company’s EPS and the compound annual growth rate for the company’s dividend has been 8.90% from 1991 to 2009. Let’s say we are more conservative and we figure a growth rate of 6% per year for both the EPS and the dividend for the coming years until 2019.

Year

Estimated EPS (growth of 6%)

Estimated dividend (growth of 6%)

2010

$6.10 (estimated)

$2.42 ($0.62 remaining (estimated))

2011

$6.47

$2.57

2012

$6.85

$2.72

2013

$7.27

$2.88

2014

$7.70

$3.06

2015

$8.16

$3.24

2016

$8.65

$3.43

2017

$9.17

$3.64

2018

$9.72

$3.86

2019

$10.31

$4.09

The investor who invests in VFC will pocket an estimated income of dividend as of this scenario of $30.11 until December 31, 2019 assuming a 6% growth of the dividend of the company. Here are 3 possibilities of the value of the stock price at the end of 2019, assuming different P/E ratios based on an EPS growth of 6% and an investment in VFC based on the current price of $78.92.

With a P/E of 10: EPS of $10.31 X 10=$103.10;

Return: 68.79% (paid dividends included) (Compound annual return of 5.99%)

With a P/E of 12: EPS of $10.31 X 12=$123.72;

Return: 94.92% (paid dividends included) (Compound annual return of 7.69%)

With a P/E of 14: EPS of $10.31 X 14=$144.34;

Return: 121.05% (paid dividends included) (Compound annual return of 9.21%)

Our second scenario is a more aggressive one. Let’s figure a growth rate of 8% per year for both the EPS and the dividend for the coming years until 2019, like the company did in the past 20 years.

Year

Estimated EPS (growth of 8%)

Estimated dividend (growth of 8%)

2010

$6.10 (estimated)

$2.42 ($0.62 remaining (estimated))

2011

$6.59

$2.61

2012

$7.12

$2.82

2013

$7.68

$3.05

2014

$8.30

$3.29

2015

$8.96

$3.56

2016

$9.68

$3.84

2017

$10.45

$4.15

2018

$11.29

$4.48

2019

$12.19

$4.84

The investor who invests in VFC will pocket an estimated income of dividend as of this scenario of $33.26 until December 31, 2019 assuming an 8% growth of the dividend of the company. Here are 3 possibilities of the value of the stock price at the end of 2019, assuming different P/E ratios based on an EPS growth of 8% and an investment in VFC based on the current price of $78.92.

With a P/E of 10: EPS of $12.19 X 10=$121.90;

return: 96.60% (paid dividends included) (Compound annual return of 7.80%)

With a P/E of 12: EPS of $12.19 X 12=$146.28;

Return: 127.50% (paid dividends included) (Compound annual return of 9.56%)

With a P/E of 14: EPS of $12.19 X 14=$170.66;

Return: 158.39% (paid dividends included) (Compound annual return of 11.12%)

The fundamentals of the company are all great: the stock is trading at 17.49% from its all time high of $95.65, a profitable volatility measured by an excellent past return of the stock compared to the market, current yield at 3.04%, safe and rising dividend, growing EPS at anticipated records levels, growing sales and creation of wealth for shareholders on a long period, correct P/E, excellent value of both current ratio and debt/equity ratio. Moreover, assuming our 2 scenarios of the growth rate of the company’s EPS and dividend for the coming years, the potential return would be in the range of 68.79% to 158.39% by 2020 (compound annual return of 5.99% to 11.12%).

Each time stores get crowded with people changing worn jeans, tell yourself you can pocket revenues and profits from this industry today and tomorrow with VFC.

Source for industry group and company description: Morningstar, Inc.

Disclosure: Author is long VFC and SPY, no position in RL

Source: Pocket Revenues With VF Corporation