Morgan Stanley released a top dividend picks list earlier this week, citing Nike Inc. (NKE, Financial) as one of its primary recommendations.
The sport apparel giant's year-to-date trajectory has been far from ideal, but its economic performance remains robust, potentially leaving its stock in oversold territory.
Based on a holistic analysis, I believe Nike is a high-quality stock, but by no means a dividend play.
Earnings review and preview
Nike's operating results have remained resilient throughout the year despite various global macroeconomic headwinds. The company delivered a solid second-quarter earnings report, trumping earnings expectations by 9 cents per share.
During its latest financial quarter, the company's NIKE DIRECT surged by 11% year over year on a currency-neutral basis, assumingly stemming from enhanced digitalization and consumer targeting. Additionally, the company resumed its $15 billion share buyback program, repurchasing $1.1 billion worth of stock.
Nike is due to release its third-quarter results on Sept. 29th, and many analysts are optimistic about the company's report.
According to Piral Dadhania of RBC Capital Market, Nike is likely to record revenue growth from China despite numerous Covid-19 lockdowns. He also believes the company's profit margins could improve due to high-level operating leverage.
Lastly, from a quantitative vantage point, Nike's income statement has been subject to conservative earnings recognition. For example, the Beneish M-Score of -2.30 means the company has recognized earnings conservatively and any accounting-driven earnings surprise will likely be to the upside.
Valuation and dividend
Even though Nike's earnings prospects seem bright, its stock is not attractively valued. Both relative and absolute valuation metrics suggest it is overvalued.
According to GuruFocus' discounted cash flow analysis, Nike's stock has a fair value of $51.59, which is well below its traded price of $96.83. In addition, the company has a price-earnings ratio of 25.15, accommodated by a PEG ratio of 2.96, indicating the market overhypes its earnings per share potential.
Nike's 1.28% dividend yield is not bad by any means, but it is certainly nowhere near the best on the market. The company presents a balanced shareholder compensation package, with share buybacks forming a significant part of its residual distribution. Moreover, Nike is reinvesting heavily to expand its footprint in emerging markets; therefore, it is unlikely that the stock will be a dividend pure-play anytime soon.
Concluding thoughts
Morgan Stanley's classification of Nike as a top dividend pick is questionable. There is no doubt that it is a high-quality company with operational finesse. However, key metrics suggest it is not a dividend pure play.
