VF Corporation: Is This Dividend Aristocrat A Buy?

| About: V.F. Corporation (VFC)

Summary

Despite recent revenue and earnings declines, VFC possesses a consistent track record and strong fundamentals for future performance.

It is a consistently high ROE business with a history of significant long-term revenue and earnings growth.

It has a history of repurchasing shares and making increasing, sustainable dividend payments.

It is conservatively financed, well-managed, and possesses a durable competitive advantage.

It has a clearly-defined comprehensive strategy for balancing future growth with distributing earnings to shareholders.

Using Warren Buffett's value investing guidelines as a filter, I have found VF Corporation (NYSE:VFC) to be an overvalued high-quality company. I have added it to my watch list and will wait for a market pull-back to establish a position.

VFC's fundamentals are very sound with consistently strong ROE and ROIC - averaging 21% and 16.7% respectively - over the past 5 years. Revenue has grown at a solid 5.5% annual clip, earnings per share have grown at a 7% yearly rate, and book value per share has averaged 4% growth each year. The company voiced optimism in their prospects for continued profitability at the end of their recent earnings call:

"We believe our strong portfolio of brands, our operational discipline, and strength and diversity of our model, will allow us to continue to deliver strong returns for our shareholders."

Their 5-year financial targets include: Revenue through 2021 is expected to grow at a five-year compounded annual growth rate between 4 percent and 6 percent; gross margin is expected to reach 51.5 percent in 2021; operating margin is expected to reach 16.0 percent in 2021; EPS is expected to grow at a five-year CAGR of between 10 percent and 12 percent.

In addition to strong profitability, the company is also conservatively financed with basically no debt. It has a current ratio of 2.4, a quick ratio of 1.36, and debt/equity of 0.41. It has also been gradually reducing its share count (from 453 million in December 2007 to 422 million as of the end of last quarter) and just announced a $5 billion share repurchase program (22% of outstanding shares at current market cap).

The company also has a durable competitive advantage thanks to its strategy of focusing investment on strong-performing brands, including Timberland, The North Face, and Vans. It also has brands that have 40+ year histories (Lee - est. 1889, Wrangler - est. 1944, Van's - est. 1966, The North Face - est. 1966, and Timberland - est. 1973), illustrating their staying power. This moat has enabled the business to enjoy consistently high profit margins and ROE.

The current purchase price of ~$54.5 earns mixed results when weighed against several valuation metrics:

P/B

P/E

P/S

P/CF

VFC

4.5

19.5

1.9

15.5

Industry

3.1

19.9

1.4

11.0

S&P 500

3.0

21.1

2.1

13.0

Additional valuation models (Jitta (fair value of $35.71) and GuruFocus (Peter Lynch fair value of $19.77, and DCF fair value of $49.87)) indicate overvaluation. My own DCF analysis allows for an annual EPS growth rate of 8% over the next 5 years (analysts project an 8.34% growth rate over the next 5 years). Assuming a terminal growth rate of 5% and a 15% discount rate yields a valuation of $35.94, making it considerably overvalued.

Though overvalued, VF Corporation does present an enticing case to income investors. Considered a " dividend aristocrat", its dividend has tripled over the past decade (~3% yield) and is very sustainable with a payout ratio of just over 50%. The dividend's long-term sustainability should be enhanced as the company executes on its massive share repurchase program (decreasing total dividend cash payouts).

Their strategic plan for growth over the next five years consists of four main efforts:

(1) Reshaping the company's brand portfolio and enabling VF's powerful brands

(2) Transforming to a consumer and retail-centric model

(3) Elevating direct-to-consumer while prioritizing digital

(4) Distorting investment toward Asia, with a heightened focus on China

Depending on the valuation metrics used, VFC is likely overpriced at current levels. However, given its reputable past, competitive position, and future prospects, VFC belongs on every value and dividend investor's watch list in case of a market correction and/or pullback in share price.

In the meantime, I highly recommend this vastly undervalued company as one of the few screaming buys in today's market.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

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