There are some things in life that people just need.

Even when times get tough or people are forced to cut back a little, there are still a number of products and/or services that people really can’t do without.

I’ve often discussed how important it is to invest in companies that provide these necessary and ubiquitous products and/or services and I’m going to do it again. The reason why is because it can be extremely profitable to follow this simple logic.

One product that I’d love to have exposure to in my own personal six-figure portfolio, but don’t yet, is clothing.

[ad#Google Adsense 336×280-IA]Think about it – what’s more ubiquitous than clothing? Can’t walk around naked, right?

The ubiquitous and necessary nature of clothing means companies that are providing the right products in the industry are in a position to profit handsomely, along with its shareholders.

Take VF Corp. (VFC).

This is an apparel and footwear company that designs and manufactures or sources from independent contractors a variety of clothing including jeans, sportswear, outerwear, luggage, and footwear.

Some of their key brands include The North Face, Timberland, Vans, Lee, and Wrangler.

The North Face is the leading outdoor clothing brand in a $25 billion market. While one can trade down, quality and warmth generally supersede pricing when it comes to outdoor wear. And The North Face’s reputation has allowed it to become a dominant brand for VFC.

VF Corp. may fly under the radar of most investors, but it probably shouldn’t.

Over the last ten fiscal years, the company has increased revenue from $6.429 billion to $12.282 billion. That’s a compound annual growth rate of 7.46%, which is very solid for top-line growth.

Meanwhile, earnings per share grew from $1.11 to $2.38 over this period, which is a CAGR of 8.84%. Not only great growth here, but the steady nature of it is certainly reassuring to investors. The secular trend of this business makes it easy to avoid the day-to-day commotion of the stock market.

S&P Capital IQ is calling for 13% compound annual growth for EPS over the next three years, citing continued growth in traditional retail channels as well as stronger growth in the direct-to-consumer channel, which offers higher margins.

The company is definitely growing at a fairly attractive clip. But don’t just tell me you’re growing; show me.

VFC does indeed show its shareholders; the company has increased its dividend for the past 42 consecutive years. That’s over four decades, which includes rampant inflation, multiple wars, and the Great Recession.

And the dividend raises have been substantial – the dividend has grown at an annual rate of 15.5% over the last decade.

CaptureThat growth is faster than earnings, which has led to an expansion of the payout ratio.

However, at 53.8%, the payout ratio is still moderate. I would expect future dividend growth to slow slightly, more or less in line with earnings growth.

The only real drawback here is the fact that the stock only yields 1.72%. That’s probably not enough to entice anyone who needs significant income right now, but the company’s growth trajectory should provide ample aggregate dividend income over the next decade or so.

Another aspect of the company that indicates its high quality is the balance sheet. The long-term debt/equity ratio is only 0.25, which is certainly more than acceptable. And the interest coverage ratio, which is over 16, is strong. This company is very financially flexible.

VFC’s profitability metrics are also robust. The company’s net margin has averaged 8.77% over the last five years with return on equity of 17.79%.

Fundamentally, this is a well-run company. And I think more than four consecutive decades of dividend raises speaks for itself. You can’t pay shareholders increasing cash flow without the rising cash flow from underlying business operations to support it.

The company has strong brands across multiple lines of clothing and footwear. And they’re not only diversified across clothing types and brands, but also across the value chain with value brands like Lee all the way up to premium brands like 7 For All Mankind. And their exposure to multiple channels across retail bodes well for the company’s ability to not only respond to changing shopping preferences, but also increase its margins in the process.

Of course, risks should be considered. Consumer demand based on fashion can change quickly, so there is a risk of brand obsolescence via changing fashion, though VFC has weathered this potential issue for many decades with no apparent problem. In addition, VFC has a penchant for pursuing growth via intelligent acquisitions. This strategy includes integration risk as well as the potential for a lack of suitable candidates and/or overvaluation moving forward.

Looking at the valuation, the stock’s P/E ratio of 31.21 seems a bit pricey here. The five-year average is only 19, so one has to be careful about paying up for quality right now.

I valued shares using a two-stage dividend discount model analysis with a 10% discount rate and a growth rate of 10% over the next ten years. That factors in the moderate and expanding payout ratio along with the forecast for higher growth for the foreseeable future. I then used a terminal rate of 7.5%, which offers a margin of safety against the earnings growth rate over the last 10 years. The DDM analysis gives me a fair value of $67.84 here.

vfcBottom line: VF Corp. (VFC) is one of the most successful apparel and footwear companies in the world. Their steady growth over the last decade has rewarded shareholders handsomely. And with high-profile and high-quality brands across multiple lines of clothing which is available through multiple channels, the company looks set to continue profiting and sharing the wealth with shareholders. Shares look a little pricey here, but this company should be on your radar.

— Jason Fieber, Dividend Mantra

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