What a tough year for the financial markets. Some dividend stocks performed relatively well in 2022, especially in the energy sector, but with the U.S. stuck in a prolonged bear market, many perennial winners in the dividend space have lost huge portions of their value.

One such name is V.F. Corporation (VFC) , which has lost two-thirds of its value this year alone. We believe the company, however, will come out of this tough period as strong as ever, and as such, we believe V.F. is the top pick for 2023. In this article, we’ll take a look at the company’s recent events, challenges it faces, as well as why it made the top spot for 2023.

V.F. Corporation is an apparel, footwear, and accessories maker that is based in Colorado, and traces its roots back to 1899. The company has three primary operating segments: outdoor, active, and work. Through these segments, the company sells a wide variety of backpacks, activewear, work wear, shoes, lifestyle apparel, and more to a global customer base through thousands of distribution points. The company’s portfolio of brands is its primary advantage, owning Vans, Supreme, Timberland, the North Face, Dickies, and more. This lucrative mix of well-known consumer brands affords V.F. pricing power and robust demand for its products in the market.

V.F. should produce about $11.5 billion in total revenue this year, so it has scale against competitors in what is generally a fragmented market for consumer apparel and accessories.

The company’s most recent earnings release is for fiscal second-quarter, and was posted on Oct. 26, 2022. The company said revenue was $3.1 billion, which was down 4% year-over-year. Foreign-exchange translation was a 6% headwind, so on a constant currency basis, revenue would have risen 2%. The company’s “big four” brands, which are the North Face, Dickies, Timberland, and Vans, saw revenue down 5% on a reported basis, and up 1% on a constant currency basis. The balance of the portfolio was up 4% on a reported basis, and up 13% in constant dollars. The North Face was the star, posting revenue of $1.0 billion, which was up 8%, and up 14% in constant currency. Vans was the laggard, with revenue of $1.0 being down 13%, and down 8% in constant dollars.

Gross margins were off 240-basis points in the second quarter on an adjusted basis to 51.5% of revenue. Operating margin fell 440-basis points on an adjusted basis to 12.3% of revenue. The declines in margin were due to higher costs and promotional activity, which were partially offset by higher selling prices.

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

V.F. said it was maintaining its constant dollar revenue outlook, but noted that its reported revenue would be lower than previously expected from the fluctuations in the US dollar. In addition, management noted higher inventory levels and increased promotional activity associated with higher inventory. Constant dollar revenue is still expected to be up 5% to 6%.

Adjusted gross margin, however, is expected to decline 100-basis points to 150-basis points, and adjusted operating margin guidance was lowered from 12% to 11% of revenue. Finally, adjusted earnings-per-share is now expected to be $2.00 to $2.20, down from the prior range of $2.60 to $2.70.

Apart from higher inventory levels, forex translation, and weakening consumer demand, V.F. has a CEO transition taking place. Steve Rendle has retired, and V.F. is under interim leadership while it searches for Rendle’s replacement. CEO transitions are never easy for a company, and Rendle has led V.F. for nearly six years. Depending upon who is selected as the new chief, it could be a catalyst for the stock in 2023.

In addition, there is talk of the company potentially selling its Jansport backpack brand for half a billion dollars. We note the sale of Jansport is unconfirmed by the company, but the capital infusion could be used to bolster the balance sheet as $500 million is about three quarters’ worth of dividend payments, so it’s quite significant.

Given all of these factors, how did V.F. make the cut as our best dividend stock idea for 2023? We like the stock’s combination of value, the dividend, and its turnaround potential. V.F. has seen sales decline for this year on the strength in the U.S. dollar, primarily. With that headwind being potentially removed for 2023, V.F. is set to produce more than $12 billion in revenue next year. That will help not only drive the top line, but should help reflate margins back to prior levels, which will help boost earnings-per-share. This depends upon consumer demand at least maintaining current levels, but we believe the path is clear to at least $12 billion in revenue next year.

In addition, the selloff of the stock this year has it trading for under 13 times earnings, which is well under our estimate of fair value at 19 times. That means that, should V.F. return to historical valuation levels at some point in the coming years, we could see a high-single digit, or even double-digit tailwind to total returns. V.F. is in deep value territory given the severity of its share price decline against less severe earnings estimate declines.

Finally, the company’s dividend is a huge draw for potential buyers. For starters, V.F. is now a Dividend King, one of fewer than 50 stocks to claim that highly exclusive title. V.F. has now raised its dividend for 50 consecutive years, a tremendously impressive streak given it operates in a highly cyclical industry. This sort of longevity is a great reason to consider the stock.

Apart from 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 uncommon, and we believe it represents a strong buying opportunity in V.F.

We note the payout ratio has the possibility of being near 100% this year, as updated earnings guidance has a midpoint of $2.10 per share, and the current dividend is $2.04. We don’t typically recommend stocks with such high payout ratios, but for V.F. we expect this condition to be temporary. Earnings should rebound sharply into next year and beyond as temporary headwinds subside, and the company has ample resources to cover any potential dividend shortfall in the short term. In other words, we believe the 50-year streak of dividend increases is all but certain to continue indefinitely.

While 2022 has been very tough, it has created opportunities for new capital to buy great companies at depressed prices. One such company is V.F., which we see as our top pick for 2023. The stock yields 8%, has what should be a safe dividend payment, possesses a clear path to turn earnings around in the near future, and trades with a trough valuation.

This combination of factors suggests we could see forward total returns in excess of 20% annually for V.F. going forward, and for these reasons, it’s our top pick for 2023.

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