Nike Inc.: This Is Why Nike Stock Is a Good Bet for Income Investors
Nike Stock is Returning Value to Shareholders
As an income investor, you probably haven’t paid that much attention to Nike, Inc. (NYSE:NKE) stock. With an annual dividend yield of 1.11%, Nike stock isn’t exactly the one you use to build a high-yield portfolio. Still, that doesn’t mean income investors should ignore the sportswear company altogether. Because going forward, Nike stock could be returning some serious value to investors.
Nike Stock: Future Looks Bright
First of all, NKE stock’s $0.16-per-share quarterly dividend rate doesn’t tell the whole story. Other than paying dividends, the company is also buying back its shares. Last November, Nike’s board of directors approved a new four-year, $12.0-billion share repurchase program. (Source: “Nike Inc Announces New $12 Billion Share Repurchase Program, 14 Percent Increase in Quarterly Dividend, and Two-For-One Stock Split,” Nike, Inc., November 19, 2015.)
Buying back one’s shares is another way for a company to return value to shareholders. It reduces the number of shares outstanding for the company, which usually increases measures of profitability, like earnings per share and cash flow per share. At the same time, it often improves performance measures like return on equity. These improved metrics would generally result in a higher share price over time, providing capital gains for investors.
The exact timing of share repurchases is usually not specified. In the fourth quarter of Nike’s fiscal 2016, which ended May 31, the company spent approximately $540 million to repurchase a total of nine million shares as part of its four-year, $12.0-billion program. (Source: “Nike, Inc. Reports Fiscal 2016 Fourth Quarter And Full Year Results,” Nike, Inc., June 28, 2016.)
The company is returning value to shareholders, but to keep the dividends and buybacks going and potentially increasing, Nike needs to grow its business. And on that front, the company seems to be in good shape.
In Nike’s fiscal 2016, revenue grew six percent year-over-year to $32.4 billion. Excluding the impact of exchange rate fluctuations, revenue growth would have been 12%. Top-line growth translated to the bottom line; for the fiscal year, Nike generated $2.16 of earnings per share, a 17% increase from the prior fiscal year.
There are positive signs for the current quarter as well. Nike’s worldwide futures orders totaled $14.9 billion at the end of May, an eight percent increase from the same period last year, and would have been an 11% increase on a currency-neutral basis. These include future orders for Nike-brand athletic footwear and apparel scheduled for delivery from June through November of 2016.
Nike stock’s performance hasn’t been that great so far this year, but the five-decade-old sportswear giant still has plenty of appeal to institutional investors. As a matter of fact, NKE stock was the second-largest purchase by institutional investors in the second quarter, only behind Yahoo! Inc. (NASDAQ:YHOO). According to FactSet, the top 50 hedge funds added $1.3 billion worth of Nike stock to the aggregate hedge fund portfolio. Some of the major buyers included Lone Pine Capital, D.E. Shaw & Co, and Renaissance Technologies LLC. (Source: “Hedge Fund Ownership,” FactSet, August 23, 2016.)
The Bottom Line on Nike Stock
At the end of the day, keep in mind that the past year wasn’t exactly nice to U.S. multinational companies. Economic growth was sluggish in many parts of the world and there were strong currency headwinds. But Nike continued to grow both its top and bottom line numbers at a decent pace and even raised its payout to income investors.
With solid operations and an excellent track record in returning value to shareholders, Nike stock deserves a spot on every income investor’s watch list.
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