Today I bought shares of VF Corporation (VFC), the world's largest apparel manufacturer. The company has a diverse portfolio of branded lifestyle apparel that includes well-known names such as The North Face, Vans, Timberland, Jansport, and Wrangler. A series of successful acquisitions (the most recent being Timberland in 2011) and expansion into international markets have driven growth over the past several years.
VF Corporation has had good operating results, with 5-year growth rates of 8.8% for revenue and 11.1% for earnings. The company has stable margins, good free cash flow, and a return on equity above 20%. Its financial position is satisfactory, with debt/capitalization of 22%, debt/equity of 52%, 14x interest coverage, and a current ratio of 1.6. Value Line gives it a safety rating of 2 and a financial strength rating of A. S&P gives it quality and credit ratings of A and A-, respectively.
The company is a Dividend Champion, having increased its dividend for 40 consecutive years. Its 10-year dividend growth rate is 12.1% and the most recent increase was 20.8%, announced in October 2012. The EPS payout ratio is 39% and the FCF payout ratio is 33%.
I consider VFC to be attractively valued at the current price. It has a P/E of 16.0 (its 5-year historic average is 15.4), P/S of 1.5, and PEG of 1.5. Using a Dividend Discount Model with a dividend growth rate of 8.5% and a discount rate of 10.9% (which equals the current yield plus the dividend growth rate), I calculate a fair value of $157.33. Morningstar gives a fair value of $169.00 and a 4-star rating, whereas S&P gives a fair value of $159.90 and a 4-star rating. The average of those three estimates is a fair value of $162.08, which implies an 11% margin of safety at the current price. Dividend Growth Investor considers the stock to be "attractively valued" in a recent article; F.A.S.T. Graphs shows the stock being "in value" in a recent analysis; and Chuck Carnevale includes VFC on his current list of "attractively valued blue-chip Dividend Champions." Thus, depending on how valuation is assessed, the stock is either fairly valued or slightly undervalued. The stock is also trading 15% off its 52-week high and today it dropped over 3% (for no apparent reason) to a 6-month low that triggered my limit order.
I bought 10 shares of VFC at the price of $144.30 per share, giving me a 2.40% yield on cost. At the current dividend rate, I can expect to receive quarterly dividends of $8.70, which will add a total of $34.80 to my annual dividend income. My 12-month forward dividend total increases to $2,138.
VFC is the 27th stock in my portfolio and provides some nice diversification in the consumer discretionary sector. Even though I am cautious when it comes to companies in the apparel industry, given that fashions can quickly go out of style, I think VFC has staying power with its diversified collection of brands. I see anecdotal evidence of this at the university where I work, with many students wearing The North Face coats and Jansport backpacks. Personally, I wear Wrangler jeans, which are very comfortable. (Now I have an incentive to go out and buy another pair!)
I lack sufficient cash to make any other purchases this month, which is just as well because I do not see many good buying opportunities. Earnings season has yet to bring much in the way of price dips for the stocks on my watch list. If VFC continues to decline, then I would consider increasing my position.