VF Corporation’s cash flow increases the safety of its dividend yield

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Summary of July selections

Based on price return, the Safest Dividend Yields model portfolio (+5.8%) underperformed the S&P 500 (+7.0%) by 1.2% from July 21, 2022 to August 17, 2022. On On a total return basis, the model portfolio (+6.1%) underperformed the S&P 500 (+7.0%) by 0.9% over the same period. The best performing large cap stocks rose 10% and the best performing small cap stocks rose 22%. Overall, nine of the 20 safest dividend-yielding stocks outperformed their respective benchmarks (S&P 500 and Russell 2000) from July 21, 2022 to August 17, 2022.

The methodology of this model portfolio mimics an “All Cap Blend” style with an emphasis on dividend growth. The stocks selected are rated attractive or very attractive, generate positive free cash flow (FCF) and economic benefits, offer a current dividend yield > 1% and have a track record of more than 5 years of consecutive dividend growth. This model portfolio is designed for investors who are more focused on long-term capital appreciation than current income, but still appreciate the power of dividends, especially dividend growth.

Featured Stock for August: VF Corporation Inc

VF Corporation Inc (VFC) is the featured stock in the August Safest Dividend Yields model portfolio.

VF Corporation has increased its net operating income after tax (NOPAT) by 4% compounded annually over the past five years. VF Corporation’s NOPAT margin decreased from 12% in fiscal 2017 (fiscal year end was 12/30/17) to 13% in the last twelve months (TTM). The increase in NOPAT raises the company’s economic profits from $583 million in fiscal 2017 to $692 million TTM.

Figure 1: VF Corporation’s NOPAT since fiscal year 2017

Sources: New Constructs, LLC and company filings

*VF Corporation’s fiscal year transitioned to 2018. NOPAT in 2018 is the TTM value for the period ended 3/30/18.

Free cash flow supports regular dividend payments

VF Corporation increased its regular dividend from $1.94/share in fiscal year 2019 (year end was 3/30/19) to $1.98/share in fiscal year 2022 The current quarterly dividend, when annualized, offers a dividend yield of 4.6%.

VF Corporation’s free cash flow (FCF) exceeds its regular dividend payouts. From fiscal year 2019 to 2022, VF Corporation generated $3.3 billion (20% of current market capitalization) in FCF while paying $3.0 billion in dividends. During the TTM, VF Corporation generated $781 million in FCF and paid $775 million in dividends. See Figure 2.

Figure 2: VF Corporation FCF vs regular dividends since FY2018

Sources: New Constructs, LLC and company filings

Companies with a high FCF offer higher quality dividend yields because the company has the cash to support its dividend. The dividends of companies with a low or negative FCF cannot be trusted as much because the company may not be able to continue paying dividends.

VFC is undervalued

At its current price of $44/share, VF Corporation has an economic price-to-book (PEBV) ratio of 0.9. This ratio means that the market expects VF Corporation’s NOPAT to decline permanently by 10%. This expectation seems overly pessimistic given that VF Corporation has increased NOPAT by 7% compounded annually over the past two decades.

Even if VF Corporation’s NOPAT margin falls to 12% (five-year average vs. 13% on the TTM) and the company’s NOPAT only increases by 3% compounded annually over the next decade, the stock would be worth over $60/share today – up 36%. Discover the calculations behind this reverse DCF scenario. If the company’s NOPAT were to grow further in line with historical growth rates, the stock would have even more potential.

Critical Details Found in Financial Documents by My Company’s Robo-Analyst Technology

Below are details of the adjustments I make based on Robo-Analyst’s findings in VF Corporation’s 10-Ks and 10-Qs:

Income statement: I made adjustments of $952 million, with the net effect of removing $318 million in non-operating expenses (3% of revenue).

Balance sheet: I made adjustments of $6.8 billion to calculate invested capital with a net increase of $4.2 billion. The most notable adjustment was $3.3 billion (33% of reported net assets) in asset write-downs.

Valuation: I made adjustments of $6.6 billion, which had the net effect of reducing shareholder value by $6.5 billion. Besides total debt, one of the most notable shareholder value adjustments was $86 million in overfunded pensions. This adjustment represents 1% of the market value of VF Corporation.

Disclosure: David Trainer, Kyle Guske II, Matt Shuler, and Brian Pellegrini receive no compensation for writing about a specific stock, style, or theme.

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