We can also look at how VF Corp (NYSE:VFC) performed during the last recession to better understand the safety of its dividend. The company’s sales fell by 6% in fiscal year 2009, and its earnings declined by 24%. VFC’s stock returned -18% in 2008 and outperformed the S&P 500 by 19%. Demand for VFC’s products is impacted by the health of the economy, which drives consumer spending, but its business model is still quite resilient.
Source: Simply Safe Dividends
The company has also generated double-digit returns on invested capital in each of its last 10 fiscal years. Strong profitability is the sign of an excellent business, and VFC’s well-known brands have helped it maintain great returns over time.
Source: Simply Safe Dividends
VFC has been nothing short of an excellent free cash flow generator and has seen free cash flow per share triple over the last decade. Free cash flow provides VFC with the flexibility to acquire other brands, repurchase its shares, and reward shareholders with higher dividend payments.
Source: Simply Safe Dividends
As seen below, VFC’s balance sheet also looks strong. The company could cover its entire debt with cash on hand and 1.5 years of earnings before interest and taxes (EBIT). Morningstar recently issued the company an “A” credit rating as well. Strong credit allows VFC to opportunistically pursue acquisitions to further enhance its long-term growth profile.
Source: Simply Safe Dividends
Overall, VFC’s dividend payment is about as reliable as they come. The company consistently generates free cash flow, maintains a conservative balance sheet, and has very healthy payout ratios.
Dividend Growth Score
Our Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
VFC’s dividend Growth Score of 77 suggests that the company’s dividend growth potential is significantly higher than most dividend-paying stocks. VFC most recently hiked its dividend by 16% in October 2015, representing its 43rdconsecutive dividend increase. VFC is a member of the S&P Dividend Aristocrats Index and seems likely to join the Dividend Kings list (companies that have increased their dividends for at least 50 consecutive years) in seven years.
As seen below, VFC’s dividend has compounded at a 17% annual rate over the company’s last 10 fiscal years. VFC targets a 40% payout ratio, which the company is slightly above today. In other words, dividend growth over the next few years will likely track earnings growth. Management expects VFC’s earnings to grow 10-15% per year, and dividend growth will likely be in a similar range.
Source: Simply Safe Dividends
While VFC’s current 2.7% dividend yield isn’t great for investors living off dividends in retirement, the company’s strong dividend growth is something to keep in mind.
