Thursday, January 24, 2013

Stock Bought: VFC

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.

12 comments:

  1. This look like a great stock. 40 years of consecutive dividend increase is as good as JNJ. I like it.

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    1. Martin: Thanks! It's hard to go wrong with a Dividend Champion.

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  2. Nice buy. I haven't looked into VFC before so thanks for bringing it to my attention. While they have a lower starting yield, the dividend growth could make up for that in the long run. They do have some great brands.

    It does seem tougher to find many stocks in the fairly valued to undervalued range. I plan to slow purchases just a little to build up more cash reserves in case of a pullback.

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    1. AAI: Thanks for your comment. VFC caught my attention when I was exploring the consumer retail space a while ago. I had been looking at stocks such as TGT and WMT, then my focus shifted to the makers of various retail products such as clothing, and VFC stood out as a potential investment.

      I have also been building a bit of a cash reserve in the sense that I intend to save any excess cash after my one purchase each month from new capital. At the moment the reserve is a bit under $1,000. My plan is to build up that reserve so that I will have some cash available for one or two extra purchases in the event of a market correction.

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  3. DGM,

    You're building your portfolio very nicely. One brick at a time builds a mansion.

    This seems like a solid buy here. I'm surprised this company hasn't done a split at some time to bring down that share price. I've looked at VFC very sparingly, but that earnings and dividend growth are both very impressive. North Face is a very strong brand, particularly.

    I like to hear that you're building up a little cash buffer above and beyond your usual monthly purchase. I wrote about that a little while back and I think that's a fair compromise between buying regularly as part of a holistic investing approach and also having a little capital on hand to take advantage of market volatility. It's something I also plan to implement going forward.

    Best wishes!

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    1. DM: Thanks! I don't know why VFC hasn't had a stock split recently; the last split was in 1997 at $91.63. However, it seems like more companies nowadays are okay with having stock prices in the hundreds of dollars, especially in the tech sector (e.g., IBM, GOOG, AAPL, AMZN).

      After another month or two I should have enough in my cash reserve for one purchase, so hopefully we don't get a major correction in the market until I'm ready for it. :)

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  4. I'm not very familiar with VFC, but I did some quick research and like what I see. I especially like the brands here. I too worry about staying power in branded clothing, but I'd be shocked if brands like Lee, Wrangler, North Face, and Vans went out of style anytime soon. Lee and Wrangler seem to target regular old middle class people, and that sort of fashion is unlikely to go out of style. Sort of like Levis. I would be more concerned about designer brands since high end fashion seems to change more rapidly.

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    1. CI: Thanks for your comment. I agree -- most of their brands are not in the high-end fashion category, so they should be less susceptible to changes in taste.

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  5. VF corporation appears to have a nice line up of different divisions. But the apparel business can be a very fickle and tricky business. Just look at JC penny. Its not a easy busines to stay on top of as it were.

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    1. QS: Thanks for your comment. It's true that the apparel business can be fickle, but I am comfortable with VF because it is not geared toward "high fashion" as much as other companies, such as RL and PVH. As for JCP, its retailing business is different than VF's manufacturing business, so I would be hesitant to make comparisons.

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