Nike Inc. (NKE, Financial) has been moving sideways over the last 12 months as competition crushed the world’s leading footwear and apparel manufacturer’s growth rate. The stock is up by just 4.7% in the last year and is now trading at around 21 times earnings, far away from the above-30 levels it used to trade at in 2016. The drop in valuation makes Nike an attractive investment.
Dividend yield
Nike’s 1.3% dividend yield is not much to write home about, but as is the case with any growing company, it prefers to reinvest as much money as it can toward growth, leaving very little to be given back to investors in the form of dividends and share buybacks. But if you are a long-term investor, you should overlook the sub-1.5% yield and invest in Nike because it will be able to keep growing dividends for many more decades.
Nike is a well-established athletic brand operating all over the world, with only a handful of competitors able to challenge it head-on. At the end of the fourth quarter of 2017, the company had $6.1 billion in cash and short-term investments against long-term debt of $3.4 billion. In 2017, Nike paid $1.33 billion in dividends, which was just 31% of its operating cash flow and 27% of its net income.
With hardly any debt on the balance sheet, Nike’s financial position is one of the strongest in the industry. This will allow it to keep increasing its dividends for many more years, even after it reaches a more mature growth phase.
Nike is still growing
Nike’s stock price has been falling since early 2016. This is not a result of its growth turning negative, but rather because the growth rate has fallen short of expectations. Nike is still growing and will continue to grow. For the fourth quarter, Nike reported 5% revenue growth and 7% on a currency-neutral basis. For full fiscal 2017, Nike reported 6% revenue growth and 8% on a currency-neutral basis.
With nearly 55% of its revenue generated outside the U.S., Nike will be able to keep growing its revenue at a decent pace. The problem is competition in the U.S. has pushed its growth rate in the region to the lowest levels we have seen in many years. This has affected the overall growth rate, which, in turn, took a direct hit on market sentiment.
If you are a long-term investor, note most of Nike’s growth over the next 20 years is going to come from overseas markets, especially developing countries. In fiscal 2017, Nike reported 17% revenue growth in greater China and 14% in emerging markets. Both market segments are growing fast and, as they get bigger, will help balance Nike’s demographic revenue composition.
As seen in the price-earnings (P/E) chart above, Nike is trading at historically low valuations, so investors should take advantage of the opportunity.
Disclosure: I have no positions in the stock mentioned above and no intentions of initiating a position in the next 72 hours.
