It’s Time To Try On VF Corporation’s 6% Yield

Key Points

• VF Corporation is at an extreme low, and income-investor should pay attention to it. 
• The company is on the verge of a turnaround, and growth should come by the end of the year. 
• The 6% yield is safe enough; the "right-sizing" has it at roughly half the expected FCF in F24. 

VF Corporation NYSE: VFC has entered a year of change that could lead the stock higher. The company is working to turn around the core brand, Vans, and improve its supply chain and efficiency, and those efforts have begun to show up in the results. The results are better than expected and come with sound guidance that suggests deleveraging is also about to begin. This is important for income investors because the stock is paying a 6% dividend, and the company remains committed to paying it.

The chart shows a market at an extreme low and ready to bounce back; the question is when will the rebound begin, and how high can it go? The post-release action has the market moving lower, but there is only so low that it can go with this stock's support. 

The analysts rate the stock at Hold, which is not a strong rating, but it has remained firm despite the recent dividend cut. Twenty-one analysts are following the stock, which is a significant indication of market support. That support is echoed by the institutions which own about 97% of the stock and were buying heavily ahead of the release. 

VF Corporation Has Mixed Quarter, Affirms Dividend 

VF Corporation had a solid quarter, given the environment and produced $2.74 billion in revenue. This is down 2.8% compared to last year but beat the Marketbeat.com analysts' consensus, if by a slim margin. Weakness in the Americas was offset by strength overseas, specifically in China, while results were mixed on a channel and brand basis.

Direct-to-consumer fell by 1%, while Wholesale fell -by 5% led by the Americas and Vans. On a brand basis, strength in The North Face was offset by a 14% decline in Vans sales and a 9% decline in Timberland.  

The margin news is also mixed. The gross margin fell by 260 basis points and operating income by 32%, but the declines were not as bad as feared. The company’s GAAP loss was less than expected, and the adjusted $0.17 beat by $0.03 or 20%.

That’s not enough to cover the dividend, but guidance was reaffirmed, and the full-year outlook is sufficient. Investors shouldn’t expect dividend increases, and share repurchases are unlikely until the debt gets “right-sized.” Still, the FCF of $900 million is enough to cover the $468 million in expected dividend payments.

How Does VF Corporation Compare To Peers? 

VF Corporation offers an interesting value-to-yield combination relative to its peers. The stock trades at 9X its earnings consensus, which is low for a 6% yielding stock and the broad market S&P 500. Names within the apparel group, like PVH Corporation NYSE: PVH and Levi Strauss NYSE: LEVI, trade at similar valuations while paying lower yields, PVH much lower. Ralph Lauren NYSE: RL  trades at a significantly higher valuation and pays a lower dividend.

The takeaway is that VF Corporation could see a price-multiple expansion over the next few years, assuming the company can whittle down the debt and free up cash flow. Even Skechers USA NASDAQ: SKX, the closest competitor in the shoe arena, trades at 16X and doesn’t pay a dividend. 

The Technical Outlook: VFC Tries To Bottom 

The market for VFC is trying to bottom. The price action moved lower following the results, but support is becoming evident at $18.50. Assuming this price level holds, the market may move sideways from here. In that scenario, a trading range may dominate prices for several quarters. If not, this stock could continue lower and open up a deeper value and higher-yield opportunity. In that scenario, the stock could fall to $12 and match the lows not seen since 2009.