Nine new stocks make our Safest Dividend Yields Model Portfolio this month, which was made available to members on August 19, 2022.
Recap from July’s Picks
On a price return basis, our Safest Dividend Yields Model Portfolio (+5.8%) underperformed the S&P 500 (+7.0%) by 1.2% from July 21, 2022 through August 17, 2022. On a total return basis, the Model Portfolio (+6.1%) underperformed the S&P 500 (+7.0%) by 0.9% over the same time. The best performing large cap stock was up 10% and the best performing small cap stock was up 22%. Overall, nine out of the 20 Safest Dividend Yield stocks outperformed their respective benchmarks (S&P 500 and Russell 2000) from July 21, 2022 through August 17, 2022.
This Model Portfolio only includes stocks that earn an Attractive or Very Attractive rating, have positive free cash flow and economic earnings, and offer a dividend yield greater than 3%. Companies with strong free cash flow (FCF) provide higher quality and safer dividend yields because we know they have the cash to support the dividend. We think this portfolio provides a uniquely well-screened group of stocks that can help clients outperform.
Featured Stock for August: VF Corporation Inc (VFC: $44/share)
VF Corporation Inc (VFC) is the featured stock in August’s Safest Dividend Yields Model Portfolio.
VF Corporation has grown net operating profit after-tax (NOPAT) by 4% compounded annually over the past five years. VF Corporation’s NOPAT margin rose from 12% in fiscal 2017 (fiscal year end was 12/30/17) to 13% over the trailing twelve months (TTM). Rising NOPAT drives the company’s economic earnings from $583 million in fiscal 2017 to $692 million TTM.
Figure 1: VF Corporation’s NOPAT Since Fiscal 2017
Sources: New Constructs, LLC and company filings
*VF Corporation’s fiscal year transitioned in 2018. NOPAT in 2018 is the TTM value for the period ended 3/30/18.
Free Cash Flow Supports Regular Dividend Payments
VF Corporation has increased its regular dividend from $1.94/share in fiscal 2019 (fiscal year end was 3/30/19) to $1.98/share in fiscal 2022. The current quarterly dividend, when annualized, provides a 4.6% dividend yield.
VF Corporation’s free cash flow (FCF) exceeds its regular dividend payments. From fiscal 2019 to 2022, VF Corporation generated $3.3 billion (20% of current market cap) in FCF while paying $3.0 billion in dividends. Over the TTM, VF Corporation has generated $781 million in FCF and paid $775 million in dividends. See Figure 2.
Figure 2: VF Corporation’s FCF vs. Regular Dividends Since Fiscal 2018
Sources: New Constructs, LLC and company filings
Companies with strong FCF provide higher quality dividend yields because the firm has the cash to support its dividend. Dividends from companies with low or negative FCF cannot be trusted as much because the company may not be able to sustain paying dividends.
VFC Is Undervalued
At its current price of $44/share, VF Corporation has a price-to-economic book value (PEBV) ratio of 0.9. This ratio means the market expects VF Corporation’s NOPAT to permanently decline by 10%. This expectation seems overly pessimistic given that VF Corporation grew 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% over the TTM) and the company’s NOPAT grows by just 3% compounded annually over the next decade, the stock would be worth $60+/share today – a 36% upside. See the math behind this reverse DCF scenario. Should the company’s NOPAT grow more in line with historical growth rates, the stock has even more upside.
Critical Details Found in Financial Filings by Our Robo-Analyst Technology
Below are specifics on the adjustments we make based on Robo-Analyst findings in VF Corporation’s 10-Ks and 10-Qs:
Income Statement: we made $952 million in adjustments with a net effect of removing $318 million in non-operating expenses (3% of revenue). Clients can see all adjustments made to VF Corporation’s income statement on the GAAP Reconciliation tab on the Ratings page on our website.
Balance Sheet: we made $6.8 billion in adjustments 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. See all adjustments made to VF Corporation’s balance sheet on the GAAP Reconciliation tab on the Ratings page on our website.
Valuation: we made $6.6 billion in adjustments with a net effect of decreasing shareholder value by $6.5 billion. Apart from total debt, one of the most notable adjustments to shareholder value was $86 million in overfunded pensions. This adjustment represents 1% of VF Corporation’s market value. See all adjustments to VF Corporation’s valuation on the GAAP Reconciliation tab on the Ratings page on our website.
This article originally published on August 26, 2022..
Disclosure: David Trainer, Kyle Guske II, Matt Shuler, and Brian Pellegrini receive no compensation to write about any specific stock, style, or theme.
 Our research utilizes our Core Earnings, a more reliable measure of profits, as proven in Core Earnings: New Data & Evidence, written by professors at Harvard Business School (HBS) & MIT Sloan and published in The Journal of Financial Economics.