V.F. Corporation Is Insanely Undervalued But Uncertainty Weighs On The Stock

| About: V.F. Corporation (VFC)
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Summary

V.F. Corp. recently announced a quarterly dividend of $0.42 per share.

The company has been increasing its dividend for the past 44 years so there is a lot of history to give investors a warm-fuzzy feeling.

The potential for a border tax weighs heavily on the company's stock price right now.

A dividend is just one of many ways a company can reward its shareholders by paying them out in cash. The investor can then choose to take the cash and run, reinvest it in the company, or invest it in a different company. After a company has made its net income for the quarter it has the choice of what to do with it and the choices are usually to either plow the money back into the business for other investments or pay some of that money back to the shareholders in the form of a dividend.

Most Recent Dividend Announcement

V.F. Corporation (NYSE:VFC) recently announced a quarterly dividend of $0.42 per share with an ex-dividend which was set for December 7th, making the must-own date December 6th. This dividend announcement is a 13.5% increase with what was announced the previous quarter and was paid to shareholders on December 19th. The dividend is currently good for a 3.4% yield on today's share price of $49.36. Based on trailing earnings, the dividend is good for a payout ratio of 58% which is pretty reasonable. From a cash flow perspective, the company has paid $620M in dividends over the past twelve months on operating cash flow of $1.5B, which is good for a 42% operating cash flow payout ratio.

Potential Future Dividends

The company has been increasing its dividend for the past 44 years so there is a lot of history to give investors a warm-fuzzy feeling. Earnings growth projections for the company are below average for a clothing company with a one-year growth rate of 7.9% and five-year growth rate of 8.56%. With that said, I believe a 7% increase to the dividend next year would be much better because there currently is a lot of uncertainty surrounding a border tax which could have a lot of implications on the company. A 7% increase would constitute an annual dividend of $1.80 for 2018 if it increases the dividend in December again.

Dividend Valuation

Now let's get to the meat and potatoes, the dividend valuation model to determine a price that the stock should be at based on the dividend alone. Since I just mentioned that the company has been increasing its dividend for the past 44 years, we know that it has a pretty long history of increasing it and should continue to increase it going into the future. The dividend growth model equation takes the form of:

Annual Dividend [D]

Rate of Return [R] - Dividend Growth rate [G]

Where D is equivalent to the current dividend, R is the rate of return desired by the investor and G is the anticipated growth rate of the dividend. For the D value I'm going to use the existing dividend rate of $1.68.

For the R value I'm going to use 7.9% because it is the smallest of the two earnings projections I referenced earlier. For the G value of the equation I'm going to use a dividend growth rate of 7% because I definitely believe the company could increase the dividend by that much in December to keep investors happy. When you plug and chug all the numbers you get a stock value of $186, which makes the stock undervalued by about 278% from today's price of $49.36. For reference, the 52-week low on the stock was $49.03 during this time yesterday.

Conclusion

The dividend discount model is just one of many ways to value a company and should be taken into consideration while trying to evaluate a company. Assumptions are always made while using valuation models and I believe I've selected some of the most conservative criteria for the valuation in this article. This valuation model shows the value of the dividend stream and that the stock is undervalued based on the dividend alone. The company has been around for quite some time and can definitely afford to increase the dividend when December comes around.

The company currently trades at a trailing 12-month P/E ratio of 17.13, which is fairly priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 14.63 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $3.37 per share and I'd consider the stock inexpensive until about $51 on a P/E method. The 1-year PEG ratio (2.17), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is expensively priced based on an earnings growth basis using a 1-year EPS growth rate of 7.9%. There are many ways to value a stock, and the dividend, P/E, and PEG methods are a common place to start.

I actually initiated my position in V.F. Corp. in late November and have been pretty upset about the purchase thus far. I will purchase shares until V.F. Corp. gets above $55, because I believe that is where it offers additional value. I've selected $55 because it is my cost basis. However, I do believe that the stock continues to offer value below $58 and I've selected $58 because it is the midpoint of the 52-week range.

I swapped out of T. Rowe Price (NASDAQ: TROW) in favor of V.F. Corp. during the 2016 fourth-quarter portfolio change-out, because I ended up turning a profit in the name (7.8%, or 35.4% annualized) and wanted to lock in those profits. So far it looks like it was a horrible swap since both the market and T. Rowe have been beating V.F. Corp. For now, here is a chart to compare how V.F. Corp and T. Rowe have fared against each other and the S&P 500 since I swapped the names.

At the end of the day, it only matters what a stock has done for one's portfolio. For me, V.F. Corp is one of my mid-sized positions and has done horribly, as I'm down 10.7% on the name, while it occupies roughly 7.7% of my portfolio. I continue to believe in the name because it continues to generate a healthy dividend. I own the stock for the dividend growth portion of my portfolio and I will continue to hold onto the stock for now. My portfolio is up 14.9% since the inception while the S&P 500 is up 10.3%. Below is a quick glance of my portfolio and how each position therein is performing. Thanks for reading and I look forward to your comments.

Company

Ticker

% Change incl. DIV

% of Portfolio

Skyworks Solutions Inc.

(NASDAQ:SWKS)

14.55%

10.45%

Electronic Arts Inc.

(NASDAQ:EA)

8.85%

3.68%

Facebook, Inc.

(NASDAQ:FB)

8.65%

9.41%

The Home Depot, Inc.

(NYSE:HD)

4.83%

4.76%

Eaton Vance Corp

(NYSE:EV)

4.31%

4.73%

Diageo plc

(NYSE:DEO)

2.38%

10.23%

AbbVie Inc.

(NYSE:ABBV)

1.67%

3.77%

Silver Wheaton Corp.

(SLW)

0.06%

7.66%

Starbucks Corporation

(NASDAQ:SBUX)

-3.01%

5.09%

General Electric Company

(NYSE:GE)

-4.17%

4.69%

V.F. Corporation

-10.32%

7.72%

Gilead Sciences Inc.

(NASDAQ:GILD)

-10.94%

20.69%

Cash

$

7.12%

Disclaimer: This article is in no way a recommendation to buy or sell any stock mentioned. This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am/we are long VFC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.