For 2023, this dividend pick will add some style to your portfolio

What a difficult year for the financial markets. Some dividend stocks performed relatively well in 2022, particularly in the energy sector, but with the US locked in a prolonged bear market, many perennial winners in the dividend space have lost huge portions of their value.

One such name is VF corporation (VFC), which has lost two-thirds of its value this year alone. We believe the company will, however, emerge from this challenging period stronger than ever, and as such, we believe VF is the best fit for 2023. In this article, we’ll take a look at the company’s recent events, challenges it faces , as well as why it finished in first place for 2023.

VF Corporation is a Colorado-based manufacturer of apparel, footwear, and accessories and traces its roots back to 1899. The company has three primary operating segments: Outdoors, Business, and Work. Through these segments, the company sells a wide variety of backpacks, athletic apparel, workwear, shoes, lifestyle apparel and more to a global customer base through thousands of distribution outlets. The company’s brand portfolio is its main asset, owning Vans, Supreme, Timberland, The North Face, Dickies, and more. This lucrative mix of well-known consumer brands gives VF pricing power and strong demand for its products in the marketplace.

VF is expected to produce about $11.5 billion in total revenue this year, so it has scale relative to competitors in what is generally a fragmented market for consumer apparel and accessories.

The newest company earnings release is for the fiscal second quarter and was released on Oct. 26, 2022. The company said revenue was $3.1 billion, down 4% year over year. Foreign currency translation represented a 6% headwind, so on a constant currency basis, revenue would have increased by 2%. The company’s “big four” brands — North Face, Dickies, Timberland and Vans — reported revenue declines of 5% on a reported basis and increases of 1% on a constant currency basis. Portfolio balance increased 4% on a reported basis and 13% in constant dollars. The North Face was the star, reporting revenue of $1.0 billion, which was up 8% and 14% in constant currency. Vans was the latecomer, with revenue of $1.0 down 13% and down 8% in constant dollars.

Gross margins fell 240 basis points in the second quarter on an adjusted basis to 51.5% of revenues. Operating margin decreased 440 basis points on an adjusted basis to 12.3% of revenues. The declines in margin are due to the increase in costs and promotional activity, partially offset by the increase in selling prices.

Adjusted earnings per share were 73 cents, down 34% year over year. The company returned $194 million to shareholders through dividends during the quarter.

VF said it was maintaining its revenue outlook steady in dollar terms, but noted that its reported revenue would be lower than previously expected amid fluctuations in the U.S. dollar. Additionally, management noted higher inventory levels and increased promotional activity associated with higher inventory. Steady dollar revenue is expected to still grow 5% to 6%.

Adjusted gross margin, however, is expected to decrease 100 basis points to 150 basis points and adjusted operating margin guidance has been cut from 12% to 11% of revenue. Finally, adjusted earnings per share should now be in the $2.00 to $2.20 range, down from the previous range of $2.60 to $2.70.

In addition to higher inventory levels, forex translation, and weakening consumer demand, VF has a CEO transition to take place. Steve Rendle has retired and VF is under interim stewardship as he looks for a replacement for Rendle. CEO transitions are never easy for a company, and Rendle led VF for nearly six years. Depending on who is selected as the new boss, he could be a catalyst for the title in 2023.

Also, we talk about the company potentially sale his backpack brand Jansport for half a billion dollars. We note that the sale of Jansport isn’t confirmed by the company, but the capital infusion could be used to bolster the balance sheet as $500 million is about three-quarters of dividend payments, so it’s quite significant.

Given all of these factors, how did VF make the cut our best dividend stock idea for 2023? We like the combination of the stock’s value, the dividend and its turnaround potential. VF reported a decline in sales for this year primarily due to US dollar strength. With that headwind potentially removed for 2023, VF is expected to produce over $12 billion in revenue next year. This will help not only drive the top line, but should help bring margins back to previous levels, which will help boost earnings per share. That depends on consumer demand at least maintaining current levels, but we think the path is clear for at least $12 billion in revenue next year.

Additionally, the stock’s sell-off this year has traded it for less than 13x earnings, which is well below our fair value estimate at 19x. This means that, should VF return to historic valuation levels at some point in the next few years, we could see a high-single-digit or even double-digit advantage over total returns. VF is in big-value territory given the severity of its stock price declines versus declines in less severe earnings estimates.

Finally, the company’s dividend is a huge attraction for potential buyers. For starters, VF is now a King of dividends, one of fewer than 50 titles to claim that highly exclusive title. VF has now raised its dividend for 50 consecutive years, an extraordinarily impressive streak given that it operates in a highly cyclical industry. That kind of longevity is a great reason to consider the stock.

Other than that, the current yield is 8%, which is about five times that of the S&P 500. This combination of dividend longevity and massive yield is extremely rare and we believe it represents a strong buying opportunity in VF

We note that the payout ratio has a chance of approaching 100% this year, as updated earnings guidance has a midpoint of $2.10 per share and the current dividend is $2.04. We generally do not recommend stocks with such high payout ratios, but for VF we expect this to be temporary. Earnings should rebound sharply over the next year and beyond as temporary headwinds ease and the company has ample resources to hedge any potential short-term dividend declines. In other words, we believe the 50-year streak of dividend hikes is pretty certain to go on indefinitely.

While 2022 has been very difficult, it has created opportunities for new capital to buy large companies at low prices. One such company is VF, which we consider to be our top pick for 2023. The stock returns 8%, has what should be a secure dividend payout, has a clear path to reverse earnings in the foreseeable future, and is trading with a minimal rating.

This combination of factors suggests that we could see future total returns in excess of 20% annually for VF going forward, and for these reasons, it is our top pick for 2023.

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