By Nathan Parsh
When investors are considering owning shares of a company in a specific sector, they often want to own the best name in the space. If investment capital is limited, dividend growth investors want to make sure they are buying shares of a company that offers the best combination of dividend growth and total returns.
V.F. Corp is a particularly strong dividend stock, on the list of Dividend Aristocrats. You can see the entire list of Dividend Aristocrats here.
This article will examine both companies in order to determine which, if any, stock investors should buy today.
Nike is the world’s largest manufacturer of athletic footwear, apparel and equipment. The Nike brand is also one of the most valuable brands in the world today. The company was founded in 1964 and has more than 73,000 employees worldwide. Nike has a market capitalization of more than $135 billion, with annual sales of more than $36 billion.
V.F. Corp is one of the world’s largest apparel suppliers. The company was founded in the late 1890s and employs 69,000 people globally. V.F. Corp, which produces top brands such as The North Face, Vans and Timberland, generates more than $12 billion in annual sales. The company has a market cap of nearly $34 billion.
Recent Financial Results
Nike reported financial results for the second quarter of fiscal 2019 on 12/21/2019.
Source: Nike’s Second Quarter Financial Results Release (INSERT LINK)
The company earned $0.52 per share in the quarter. This was a 13% improvement from the previous year and $0.07 above consensus estimates. Revenues grew nearly 10% to $9.4 billion, with 14% growth on a currency-neutral basis. Revenues were $200 million higher than expected. Gross margins improved 80 basis points to 43.8%, despite a 14% increase in SG&A and a 4% increase in demand creation costs. Digital sales, which have become an area of focus for Nike in recent years, were up a currency-neutral 41%.
North America sales, which were showing a decline as recently as the third quarter of fiscal 2018, were up 9%. Footwear sales improved 8% and apparel was higher by 10% for this region in the quarter. North American sales represented ~37% of total sales.
International markets have been a source of strength for Nike and the most recent quarter was no different. International revenues improved 11% on a reported basis and 20% in constant-currency.
Greater China continues to be the real driver of growth for Nike with 26% increase in sales during the quarter. Excluding the negative impact of currency exchange, sales were up 33%. Footwear and apparel increased 29% and 23%, respectively. Sales in China now contribute 16.5% to total sales. Growth in China has become a regular occurrence for the company and should continue to fuel sales going forward.
Results were so strong and so well received by the market that the company’s stock increased 7% following the earnings release. That same day, the S&P 500 index declined 2%.
Nike expects to earn $2.65 per share in fiscal 2019. If achieved, this would represent 10.4% growth from the previous year. The company has increased earnings-per-share by 11% over the last decade. Due to a return to growth in North America and continued strong performance in international markets, we forecast that the company can maintain this growth rate going forward.
Based off the company’s guidance earnings-per-share for the current fiscal year and our expected earnings growth rate of 11%, Nike could earn $4.47 per share in 2024 if our expected growth rate is achieved.
V.F. Corp reported financial results for the third quarter of fiscal 2019 on 1/18/2019.
Source: V.F. Corp’s Third Quarter Financial Release, slide 10.
Earnings-per-share grew 30% to $1.31, $0.20 more than analysts were expecting. Revenue improved 7.9% to $3.94 billion, which was $70 million more than expected. Adjusted gross margins increased 50 basis points while adjusted operating margin improved 280 basis points.
International sales were up just 4%, but China showed 18% growth. Direct-to-consumer sales, also an area of focus for V.F. Corp over the past year or so, were higher by 9% with digital sales improving 21%.
Source: V.F. Corp’s Third Quarter Financial Release, slide 11.
The company’s top selling brands, Vans, The North Face and Timberland, produced mid double digit sales growth as a group.
Vans led the way with 25% growth in global sales. In North America, revenues improved 28% thanks to strong holiday sales. Sales from the Asia region were higher by 37%. Vans has now seen consecutive quarters of 25%+ sales growth.
Revenues for The North Face Brand improved 14% overall. This segment had strength in all geographies, leading to 19% wholesale growth and 10% improvements in direct-to-consumer sales. Mountain Sports & Urban Exploration product categories were the main drivers of growth.
Timberland sales increased 1%, though digital sales were up 15%. Strength in U.S. sales (up 6%) and the rest of the Americas region (up 12%) were offset by declines in Europe/Middle East/Africa (down 5%) and Asia (down 3%).
V.F. Corp’s jean businesses, Wrangler and Lee, continue to see declines in sales. Sales for Wrangler were down 2% while Lee saw a decline of 9% due to weakness in core markets. V.F. Corp has announced that it intends to spin off its two jeans businesses into a standalone company called Kontoor Brands. This will allow V.F. Corp to focus on its top performing brands. The spinoff is expected to be completed in the first half of this year.
V.F. Corp expects to earn $3.73 during the fiscal year, which would be a 21% improvement from the previous year. The company has increased earnings-per-share at annual rate of 8.3% over the past ten years. With V.F. Corp divesting its underperforming jeans businesses, the remaining brands should allow the company to maintain this growth rate going forward.
Based off the company’s guidance earnings-per-share for the current fiscal year and our expected earnings growth rate, V.F. Corp could earn $5.56 per share in 2024.
Nike has increased its dividend for the past 17 years. The company has increased its dividend:
- By an average of 12.6% per year over the past three years.
- By an average of 13.8% per year over the past five years.
- By an average of 13% per year over the past 10 years.
Nike has demonstrated relatively consistent dividend growth over the short, medium and long term. The company most recently increased its dividend by 10% for the payment made on 1/2/2019. While slightly below the listed averages, this increase was still double digits. Shares of Nike yield 1% at the moment, well below the 1.9% yield of the S&P 500.
During the last recession, Nike paid 22.2% more in dividends in 2008 than it did in 2007. The next year, dividends were higher by 13.6%. That is a fairly impressive performance during this period of time, but given Nike’s increase in profitability during this time, not a completely unexpected result.
Based off expected dividends-per-share of $0.88 for 2019 and the company’s expected earnings-per-share of $2.65, Nike has a dividend-pay-out ratio of 33%. This is slightly above the company’s 10-year average payout ratio of 29%.
Some investors prefer to use cash flow to determine the safety of a company’s dividend. In the first two quarters of fiscal 2019, Nike generated $2.83 billion in cash from operating activities and spent $630 million on capital expenditures for free cash flow of $2.2 billion. The company paid $638 million in dividends during the same time period for a free cash flow dividend payout ratio of just 29%. Last year, dividends consumed 32% of free cash flow.
By either earnings-per-share or free cash flow, these low dividend payout ratio makes it likely that Nike will continue to pay and raise its dividend in the future even in the event a recession.
After looking at payout ratios, investors should also consider the amount of debt that a company is carrying on its balance sheet. Companies with lots of debt may be at risk for a dividend cut in order to payback its financial obligations.
Through the first two quarters of the company’s fiscal year, Nike generated $65 million of interest expense and had $3.47 billion of debt outstanding for an annualized weighted average interest rate of 3.7%.
The following image shows how changes to Nike’s weighted average interest rate would impact the company’s dividend coverage, as measured by free cash flow.
Source: Sure Dividend Calculations
As you can see from the image above, Nike’s weighted average interest rate would need to increase to almost 65% before its dividend would no longer be covered by free cash flow. Therefore, we feel that Nike’s debt level is highly unlikely to impact the safety of its dividend moving forward.
V.F. Corp has an impressive dividend growth history of its own, with 46 years of dividend growth. The company is only a few years from becoming a member of the exclusive Dividend Kings, a group of exclusive stocks with 50+ years of dividend increases.
The company has increased its dividend:
- By an average of 12.4% per year over the past three years.
- By an average of 15.6% per year over the past five years.
- By an average of 12.5% per year over the past 10 years.
While V.F. Corp’s average dividend growth has varied a little more than Nike’s, the annual increases were often in the low to mid double digit range. Most recently, the company increased its dividend 10.9% for the December 2018 payment. V.F. Corp’s stock offers a dividend yield of 2.40% currently, much higher than the yield of Nike’s stock and slightly higher than the average yield of the S&P 500.
V.F. Corp increased its dividend 3.6% from 2007 to 2008. The following year, the company increased its dividend by 1.7%. As was discussed above, V.F. Corp saw decline in sales and profitability so the meager dividend increases are not surprising. Using the last recession as evidence, V.F. Corp could likely slow the growth for its dividend without having to make a cut.
Based off expected dividends-per-share of $2.04 for 2019 and the V.F. Corp’s expected earnings-per-share of $3.73, V.F. Corp has a dividend-pay-out ratio of 55%. This is slightly above the company’s 10-year average payout ratio of 43%. This is still a fairly low payout ratio, especially given the company’s double digit increases over the past decade.
Through the first nine months of fiscal 2019, V.F. Corp generated $1.4 billion in cash from operating activities and spent $195 million on capital expenditures for a free cash flow total of approximately $1.2 billion. The company paid $565 million in dividends during the same time period for a free cash flow dividend payout ratio of 47%. Over the same time period last year, dividends consumed 33% of free cash flow. The year-over-year increase is the payout ratio is quite large, but still not at a level that should concern investors.
Through the first three quarters of the company’s fiscal year, V.F. Corp generated $73 million of interest expense and had $2.1 billion of debt outstanding for an annualized weighted average interest rate of 4.6%.
The following image shows how changes to V.F. Corp’s weighted average interest rate would impact the company’s dividend coverage as measured by free cash flow.
Source: Sure Dividend Calculations
As you can see from the image above, V.F. Corp’s weighted average interest rate would need to rise well above 30% before its dividend would no longer be covered by free cash flow. Accordingly, we feel that V.F. Corp’s debt level is highly unlikely to impact the safety of its dividend moving forward.
In terms of dividend yield and consecutive years of dividend growth, V.F. Corp is the clear winner. The company will likely become a Dividend King in the next few years and the current yield is almost 2.5x the yield of Nike. V.F. Corp also offers a yield that is above that of the S&P 500.
In terms of dividend growth over the short, medium and long term, both companies have very similar averages.
Nike, however, outperforms V.F. Corp when it comes to dividend payout ratio using both earnings-per-share and free cash flow. Nike’s dividend payout ratio using earnings-per-share is a slightly above the company’s 10-year average, but the amount of free cash flow used on dividends declined year-over-year. V.F. Corp, on the other hand, saw an increase in both areas. Nike also produced better dividend growth during the last recession, a sure sign that the dividend was likely safe from being cut.
Investors looking for yield may prefer V.F. Corp and the dividend is likely very safe, but we prefer Nike’s dividend growth during the last recession and the low payout ratios.
Valuation and Expected Returns
Shares of Nike currently trade at $85.43. Using the company’s guidance for earnings-per-share of $2.65 for the current year, the stock’s price-to-earnings ratio is 32.2. The stock’s 10-year average price-to-earnings ratio is 20.5. It should be noted that the average price-to-earnings ratio of the S&P 500 is 21.4.
Due to continued strength in China and a return to growth in North America over the past few quarters, we have a target price-to-earnings ratio of 21.5 for 2024. If shares were to revert to our target valuation, investors would see total returns reduced by 7.8% over this time period.
Fortunately, total annual returns also consist of expected earnings-per-share growth and dividends. Total annual returns for Nike would be as follows:
- 11% earnings growth
- 1% dividend yield
- 7.8% multiple reversion
Therefore, we estimate that shares of Nike can offer a total annual return of 4.2% through 2024. We have a $96 price target on shares of Nike due to our 2024 forecast for earnings-per-share of $4.47 and forward price-to-earnings ratio of 21.5.
Shares of the company are up 16.5% since the start of 2019 and 27.9% over the past year. Nike has produced excellent results recently and markets have a tendency to bid shares of well performing companies much higher. For comparison, the S&P 500 is up 11.4% to start the year and just 1% over the last year.
V.F. Corp has a current share price of $84.78. Using the company’s earnings-per-share guidance of $3.73 for the current year, the stock’s price-to-earnings ratio is 22.7. The stock’s 10-year average price-to-earnings ratio is 17. Due to the company’s spinoff of its underperforming jeans business in order to focus on high growth areas, we have increased our price-to-earnings ratio target for 2024 to 18. If shares were to revert to this valuation, total annual returns would be reduced by 4.5% over this time.
Total annual returns would consist of the following:
- 6.9% earnings growth
- 2.4% dividend yield
- 4.5% multiple reversion
We forecast that V.F. Corp can offer a total annual return of 4.8% over the next five years. We have a $100 price target on shares of V.F. Corp due to our 2024 forecast for earnings-per-share of $5.56 and price-to-earnings ratio of 18.
Like Nike, V.F. Corp has performed quite well recently. The stock is up more than 20% year-to-date and 15.8% over the last 12 months. Again, these returns vastly outperform the broad market index.
We feel that when investors are picking between two companies in the same sector, they need to examine recent financial results, dividend history, valuation and expected total returns before making an investment decision.
In terms of valuation and total return, V.F Corp is the clear winner. The stock’s valuation is much lower than Nike’s and is much closer to our target valuation. Our forecasted total return is low for both companies, but V.F. Corp offers slightly more total return potential than Nike does today.
One of the areas Nike tops V.F. Corp is in the area of earnings growth. We feel that the company has double digit earnings growth potential going forward, but with a price-to-earnings ratio above 32, this may already be priced into the stock. We also like how well Nike operated during the last recession. This enabled the company to offer high levels of dividend growth.
Sure Dividend usually awards buy recommendations to stocks offering at least 10% total annual return. We estimate that both Nike and V.F. Corp offer a total return below this level at the moment so they receive a hold rating right now.
On a pullback, those recommendations could change. Of the two names, we feel investors looking for growth should purchase Nike, despite its valuation. If the stock price decreased, it would likely drive the valuation lower. Nike performed better during the last recession, has a very recognizable brand and a higher expected earnings-per-share growth rate.
For more income orientated investors, V.F. Corp would be our pick if shares were to retreat from their current price. The stock offers a much higher yield and a much longer dividend growth streak.
Disclosure: I am/we are long NKE, 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.