I stumbled upon something disturbing while assembling this week’s Empire from which the Top Ten is built. When selecting at least five tickers from each sector1, I noticed a new ticker in the five stocks that comprise the Consumer Discretionary component of the Empire. Since the Empire was first established, the Consumer Discretionary offerings have been as follows:
| Ticker | Years |
| GPC | 66 |
| LOW | 60 |
| LEG | 51 |
| VFC | 50 |
| MCD | 47 |
VF Corportation [VFC] suddenly disappeared and Sonoco Products Co [SON] founds its way onto the list.
| Ticker | Years |
| GPC | 66 |
| LOW | 60 |
| LEG | 51 |
| MCD | 47 |
| SON | 40 |
The Sure Dividend Research Database now has zero years associated with VFC. I was really just hoping that the database had been populated with a faulty link. Nope. VFC, a newly crowned Dividend King, has reduced its dividend. And folks, do you know what this means?
VF Corporation has abdicated the throne!
King for a Day
On October 26, 2022, VFC announced a 2% increase to their quarterly dividend, and as it was their 50th straight year of increases, they became a Dividend King. Less than four months later, on February 7, 2023, VFC announced a rather large reduction after paying the new $0.51 quarterly dividend just once:
- Rightsizing the dividend payout to accelerate the return to the Company’s target leverage ratio and provide additional financial flexibility, positioning VF to navigate the current macro-economic challenges while continuing to make investments to advance its strategy. As a result, VF’s next quarterly per share payment will reduce to $0.30 from $0.51 per share. The Company expects to grow future dividends in line with earnings
Maybe it was premature to Coronate a company as King before they complete the year of their 50th dividend increase, but then one could also say it might be premature to say the throne is abdicated before the year is over. None of that really matters. What matters is that, barring some change of heart or earnings miracle in the next few quarters, VFC has thrown away a 50-year history. Think about that. It will be another 50 years, minimum, before they can be called a Dividend King again.
Did VFC Need to Reduce their Dividend?
Two weeks ago, because of a systematic overweighting of LEG, MMM, QCOM, and TDS, the opportunity to expand the portfolio presented itself. Unfortunately, or in this case, fortunately, the rules I’ve set up also prevent overweighting a sector. Without such a constraint, I would have purchased VFC with zero regard for the fact that it is in the same sector as LEG. In fact, VFC was number one several weeks in a row in the Top Ten. It had become grossly undervalued and I was anticipating a week where it would qualify for the portfolio. Had I bought it two weeks ago, I would now be thinking I was cursed. Imagine buying an undervalued stock because of its remarkable and proven history of being shareholder friendly and then finding out they’re reducing their dividend by 41% just 8 days later, less than four months after having raised it! I missed it by that much. It is natural to ask if this dividend reduction was truly necessary.
Cutting the dividend to $0.30 will save about $81.4 million per quarter. Their earnings projection for the entirety of their FY2023 of which only one quarter remains is $2.05 – $2.15 per share. That means to achieve the midpoint of $2.10, Q4 will need to come in at $0.16 which is markedly lower than even the new $0.30 quarterly dividend. However, the fourth quarter’s drop-off in earnings is very typical in the highly cyclical nature of their earnings. But, with no dividend reduction and assuming the earnings comes in at the midpoint estimate, the payout ratio would be (0.50 + 0.50 + 0.51 + 0.51) / 2.10 = 2.02/2.10 or 96.2%. That’s certainly high, but the dividend would still have been covered for FY2023.
Further, their guidance for FY2024 is to see double digit growth. So they’re expecting earnings for FY2024 to be at least 10% greater than FY2023. So, yes, the going has gotten tougher, but their own forecast would see a slight drop in the payout ratio assuming the smallest of dividend increases.
I am not close to the company, and I have not dissected their financials. VFC announced a changing of their CEO and with that we have a clear change in direction. Who knows what types of discussions took place? Was there a refusal of the former CEO to cut the dividend? Was this new, interim CEO chosen specifically because he was willing to slash and burn? Imagine being a fly on the wall in those boardroom discussions. Actually, my experience was such that even those types of meetings were boring and repetitive.
I am sure management and the board could provide all the justification in the world for their decision. It comes down to priorities. I have seen this before – it is not altogether uncommon for a company to use a high dividend yield (in VFC’s case over 7%) as an excuse to reduce the dividend. Perhaps if we had seen VFC lose money in consecutive years or even just have a payout ratio north of 100% for a couple of years, the reduction would be warranted. Simply put, the dividend was not a priority. This dividend reduction could not have been the last resort.
And it has to be.
1Certain sectors have fewer than five Dividend Kings. In order to make sure each sector with fewer than five Kings has enough representation in the Empire, companies with the highest dividend increase streaks under 50 years are added until a total of five stocks is reached. These additional companies are referred to as Royal Heirs on the Empire page.