Here’s Why Nike Stock Will Turn Around in 2017
Nike Inc (NYSE:NKE) stock was the Dow Jones’ worst performer in 2016, falling nearly 20% versus the Dow’s impressive return of 13%. Ouch.
But as longtime followers of my articles know, there’s really nothing that gets me more excited than when a proven industry leader experiences a prolonged stock price slump. Why? Because as long as sector fundamentals don’t completely deteriorate, there’s usually no easier way to earn a solid, long-term return in the market than by buying wonderful companies when they go on sale.
Does Nike stock fit that description? Well, given the company’s historically dominant and well-established position in the athletic apparel space, it’s at least worth investigating.
The problem for Nike stock in 2016 centered around two fundamental problems: slowing sales growth and declining margins. Unfortunately for Nike stock owners, though, the negative trends don’t seem to be letting up.
In the most recent quarter, Nike posted revenue growth of just six percent, a far-ish cry from the company’s double-digit growth days of several years ago. Far more concerning, however, is the fact that Nike’s gross margin continues its downward slide; in the fourth quarter, the gross margin fell 140 basis points to a multi-year low of 44.2%. (Source: “NIKE, Inc. Reports Fiscal 2017 Second Quarter Results,” Nike Inc, December 20, 2016.)
The negative trends are particularly concerning as they reinforce the notion that fierce rivals Under Armour Inc (NYSE:UA) and adidas AG continue to erode Nike’s market share.
On the bright side, positive momentum in Nike’s wheelhouse basketball category, as well as a strong resurgence in China, has management feeling rather optimistic.
The company now expects full-year 2017 revenue growth in the high single-digits.
“NIKE’s ability to attack the opportunities that consistently drive growth over the near and long term is what sets us apart,” said Mark Parker, chairman and chief executive officer of Nike. “With industry-defining innovation platforms, highly anticipated signature basketball styles and more personalized retail experiences on the horizon, we are well-positioned to carry our momentum into the back half of the fiscal year and beyond.”
Dividend Slam Dunk
Of course, as income-oriented investors, our main concern is whether or not Nike’s fundamentals can support consistent dividend growth going forward. Well, that one’s easy.
No matter how the underlying business has performed, Nike has increased its quarterly dividend for 15 years straight, so it’s fair to expect that streak to continue well into the foreseeable future. Furthermore, Nike’s trailing 12-month operating cash flow stands at $3.7 billion versus cash dividends of $1.1 billion, while the company’s payout ratio clocks in at a comforting 29%.
To be sure, Nike is habitually one of the stingiest dividend payers in the Dow Jones, preferring to make shareholders happy through huge buybacks and price appreciation (you know, when it isn’t crashing) instead.
Even after Nike stock’s recent slump, it sports an unexciting dividend yield of just 1.4%.
The Bottom Line on Nike Stock
Nike stock should have a firm place on every income investor’s watch list. Why? Because while Nike’s dividend could certainly be larger and grow at a much faster rate, it is stable, is consistent, and, most importantly, doesn’t cramp management’s ability to opportunistically repurchase shares.
Furthermore, Nike is dealing with its competitive challenges far better than many on Wall Street initially feared, and a big reason for that is the company’s financial flexibility.
Remember: there’s absolutely nothing wrong with holding a few dividend stocks where capital appreciation is counted on for most of the total return. That is, of course, if the valuation is cheap enough to leave enough upside in the first place. With Nike stock still off about 20% from its 52-week highs and trading at a forward price-to-earnings ratio in the mid-20s, that definitely looks to be the case.