A Brief History of VF's Returns


Despite constant attempts by analysts and the media to complicate the basics of investing, there are really only three ways a stock can create value for its shareholders:

  1. Dividends.

  2. Earnings growth.

  3. Changes in valuation multiples.

In this series, we drill down on one company's returns to see how each of those three has played a role over the past decade. Step on up, VF (NYS: VFC) .

VF shares returned 362% over the past decade. How'd they get there?

Dividends were a big help. Without dividends, shares returned 251% over the last 10 years.

Earnings growth was fairly strong. VF's normalized earnings per share grew by an average of 8.1% a year from 2001 until today -- above the market average, and on par with other apparel manufactures like Gap (NYS: GPS) and American Eagle (NYS: AEO) .

But solid earnings growth alone doesn't explain why VF's returns were so high. After all, shareholder returns grew faster than earnings over the past decade. How'd that happen? Here's how:


Source: S&P Capital IQ.

VF is one of only a handful of companies that saw its valuation multiple rise over the past 10 years. Most companies were overvalued a decade ago, so earnings growth ever since hasn't been fully reflected in shareholder returns. VF is in the opposite boat -- as valuations expanded, shareholder returns have surpassed earnings growth.

What a joy that's been for investors. But take note: At 22 times earnings, shares aren't exactly cheap these days. While expanding multiples put a tailwind behind returns over the last decade, flat or even falling multiples could be a headwind in the coming years.

Why is this stuff worth paying attention to? It's important to know not only how much a stock has returned, but where those returns came from. Sometimes earnings grow, but the market isn't willing to pay as much for those earnings. Sometimes earnings fall, but the market bids shares higher anyway. Sometimes both earnings and earnings multiples stay flat, but a company generates returns through dividends. Sometimes everything works together, and returns surge. Sometimes nothing works and they crash. All tell a different story about the state of a company. Not knowing why something happened can be just as dangerous as not knowing that something happened at all.

At the time thisarticle was published Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of Gap. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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