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Ben Reynolds
Ben Reynolds
Articles (727)  | Author's Website |

Nike: A World-Class Dividend Growth Stock

See the investment prospects of Nike analyzed in detail

November 17, 2018 | About:

Long-term, buy-and-hold investors should focus less on a stock’s current dividend yield, and more on its ability to grow dividends over the long run. In many cases, dividend stocks with extremely high yields are in troubled financial condition. For investors looking decades down the road, preference should be given to companies with strong brands, durable competitive advantages, and growth potential to raise their dividends each year.

Nike Inc. (NYSE:NKE) has raised its dividend for 17 years in a row, including a recent 10% increase on Nov. 15. Nike’s track record of dividend increases qualifies it on the list of Dividend Achievers. It is also a high-growth dividend stock, with the potential to continue raising its dividend by 10% or more each year going forward. This makes Nike one the best dividend growth stocks in the entire stock market.

Business model and recent events

Nike is a global footwear and athletic apparel company. In addition to the core NIKE brand, other footwear brands include Converse and Hurley. The company generates annual revenue above $36 billion. Nike is a world-class brand—according to Forbes, Nike has the 18th most valuable brand in the world, worth $32 billion.

Nike’s most recent earnings report showed the strength of its brand portfolio. Revenue of $10 billion increased 10% from the same quarter last year. The NIKE brand led the way with 10% sales growth, followed by Converse with 7% growth last quarter. Nike’s strong brands give the company the ability to raise prices, which helps boost revenue growth. Meanwhile, earnings-per-share increased 18% year-over-year, and easily beat analyst expectations.

Two of Nike’s major growth catalysts include the emerging markets, and e-commerce. While developed markets like North America continue to perform well, with 6% sales growth last quarter, emerging markets such as China represent Nike’s next growth frontier. For example, currency-neutral sales in China increased 20% last quarter. There is plenty of runway left for Nike in China, as Nike still has less than 30% market share in China. Elsewhere, sales in Asia-Pacific (excluding China) and Latin America rose 14%. Emerging markets are very attractive regions for future growth, as developing regions have large populations and high economic growth.

Separately, Nike is rapidly building its e-commerce business, under the NIKE Digital segment. As consumers increasingly shop online, brick-and-mortar retailers are struggling mightily to retain traffic. Rather than continue to see its retail partners post sluggish sales, Nike has taken the appropriate steps to adapt to changing consumer preferences, by investing in its own digital platform. For example, NIKE Digital generated 36% growth last quarter, and should be a continued growth catalyst moving forward, as direct to consumer sales now account for 30% of total revenue. Nike has proven that it is basically invulnerable to the downturn gripping the brick-and-mortar retail industry.

Financial fitness leads to dividend growth

Nike’s high revenue and earnings growth naturally benefits shareholders, as the company returns a great deal of cash through dividends and buybacks. In June 2018, Nike approved a $15 billion, four-year share repurchase authorization. In addition, the company is committed to paying a rising dividend.

Nike has raised its dividend for 17 consecutive years, including a 10% increase on 11/15/18. The forward dividend yield rises to 1.2%, with the upcoming dividend payable on 1/2/19. Investors can be highly confident that not only will Nike raise its dividend again in 2019, but also that it will provide another 10%+ increase.

Analysts currently expect Nike to generate earnings of $2.62 in the upcoming fiscal year. With an annual dividend payout of $0.88 per share, Nike’s forward payout ratio is just 34%. This means the company is currently distributing slightly more than one-third of its annual earnings to its shareholders as a dividend. A payout ratio this low leaves plenty of room for a high dividend growth rate, especially since the company continues to grow earnings at a double-digit rate. As a result, investors should anticipate the company to provide at least a 10% dividend increase each year.

Final thoughts

The best stocks to buy-and-hold over the long run have a few qualities in common. They have strong brands, competitive advantages, and growth potential. Nike has all of these qualities. It has one of the most recognizable brands in the world, an iron-clad leadership position against competitors, and the company has increased its earnings by 11% per year over the past decade. While Nike stock has a relatively low dividend yield of 1.2% today, which might not be too appealing for income investors, it is an excellent stock for dividend growth.

Disclosure: I am not long any of the stocks mentioned in this article.

About the author:

Ben Reynolds
I run Sure Dividend, a website that finds high quality dividend stocks for long term investors using the 8 Rules of Dividend Investing.

Visit Ben Reynolds's Website


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