NKE Stock Deserves Income Investors’ Attention
If you followed the markets long enough, you’ll likely have noticed one thing: sentiment is hard to predict for individual stocks. For instance, a company may release a great earnings report on a day that the markets advanced, but its stock could still tumble on the news.
Case in point: Nike Inc (NYSE:NKE) reported earnings on Thursday, March 21 after the closing bell. In the after-hours trading following the press release, Nike shares tanked over four percent.
And it’s not like the market was plunging. On Thursday, both the S&P 500 Index and the Nasdaq Composite climbed more than one percent.
Given that Nike has been one of our favorite dividend stocks here at Income Investors, is the after-earnings tumble something to worry about?
Not really.
Maintaining Top-Notch Dividend Safety
When there’s an earnings report, the first thing you would want to check—if you are looking to collect dividends—is the company’s dividend safety. In other words, you’ll want to make sure that the company made enough profits to cover its payout.
On that front, Nike looks rock-solid. In the third quarter of its fiscal 2019, which ended February 28, the company generated diluted earnings of $0.68 per share. This easily covered its quarterly dividend payment of $0.22 per share. (Source: “Nike, Inc. Reports Fiscal 2019 Third Quarter Results,” Nike Inc, March 21, 2019.)
In the first nine months of Nike’s fiscal year 2019, the company’s diluted earnings came in at $1.87 per share. Since Nike declared total dividends of $0.64 per share during this period, it achieved a payout ratio of 34%.
As a rule of thumb, I like to see companies paying out less than 75% of their profits in order to have a margin of safety. By paying out just over one-third of its profits, Nike’s dividend policy is more than safe to me.
Nike Inc Is Running a Growing Business
The second thing to look for in an earnings report is the direction in which the business is going. The good news is, despite being a decades-old company, Nike’s business is still growing.
In the reporting quarter, Nike Inc generated $9.6 billion in revenue, marking a seven-percent increase year-over-year. Excluding currency changes, revenue would have been up by 11%.
Growth was across the board. During the third fiscal quarter, Nike’s North America sales increased by seven percent. In Europe, the Middle East, and Africa, sales were up by nine percent. Greater China delivered a whopping 23% top-line growth, while sales in Asia Pacific and Latin America edged up by four percent.
Mind you, Nike’s revenue was in line with expectations and its earnings of $0.68 per share actually beat Wall Street’s estimates of $0.65 per share. So why did NKE stock drop immediately after earnings?
Well, one factor was that in North America, Nike’s biggest market, the company’s sales did not grow by as much as some analysts were expecting.
But as we just looked at, things are going more than well at this Beaverton, Oregon-based sports apparel and footwear company.
Also, note that Nike’s investments in its digital platform have started to pay off.
“As a whole, our NIKE Digital business was up an impressive 36% in the quarter, on a constant currency basis,” said the company’s Chairman, President, and Chief Executive Officer, Mark Parker. (Source: “Prepared Remarks / Unofficial Transcript – Q3FY19 NIKE, Inc.,” Nike Inc, March 21, 2019.)
More Dividend Hikes Likely on the Way
Add it up, and you’ll see that Nike has a fast-growing business and a conservative payout ratio. For a company that’s willing to return cash to investors, this will likely mean one thing: more dividend hikes are on the way.
Looking back, we see that Nike has paid increasing dividends every year since 2002. (Source: “Dividends,” Nike Inc, last accessed March 22, 2019.)
Trading at $83.29 apiece, Nike stock offers an annual dividend yield of 1.06%.
And that’s not all. Because paying a growing dividend is not the only way through which NKE stock returns cash to investors; the company is also buying back its shares.
In fact, Nike had just completed a four-year, $12.0-billion share repurchase program and is now pursuing a new four-year, $15.0-billion program. By buying back its shares, the sportswear giant lowers the number of shares outstanding, allowing each existing investor to own a slightly larger portion of the company.
Is the Best Yet to Come?
Looking forward, the company has issued quite cheerful guidance. Nike’s Chief Financial Officer Andy Campion said that for the fourth quarter of the company’s fiscal year 2019, revenue growth would be in the high-single-digit range after excluding currency changes. For the next fiscal year, Nike’s top-line number is also projected to increase by high single digits.
And if you are concerned about the after-earnings tumble, keep in mind that over the past 12 months, Nike stock is still up nearly 30%.
Nike Inc (NYSE:NKE) Stock Chart
Chart courtesy of StockCharts.com
If Nike can continue the growth momentum in its business, its stock could eventually get back on its uptrend. Meanwhile, the company’s steadily increasing stream of dividends should provide income investors with a peace of mind.