Nike Inc: The Most Overlooked Reason to Own Nike (NKE) Stock
December 7, 2016
Nike Stock is a Top Dividend Pick
“The king of the hill can only go down.”
This has been the argument of many Nike Inc (NYSE:NKE) stock bears. The company is the top player in the U.S. athletic footwear market, with roughly 60% share. Some investors are worried that, if competitors start to take some of that market share away, Nike stock would be in trouble.
And let’s be honest: on that front, Nike stock bears do have a point. The sportswear industry is extremely competitive. In particular, the challenger Under Armour Inc (NYSE:UA) has been growing faster than Nike for the most part in recent years.
But does that mean investors should ditch Nike stock altogether? I think not.
First of all, despite being the incumbent of a competitive industry, Nike is not standing still. In fact, it is still growing.
In Nike’s most recent fiscal quarter, revenue grew eight percent year-over-year to $9.1 billion. Excluding exchange rate fluctuations, revenue growth would have been 10%. The bottom line improved as well. Diluted earnings per share came in at $0.73, representing a nine-percent increase from the year-ago period. (Source: “Nike, Inc. Reports Fiscal 2017 First Quarter Results,” Nike Inc, September 27, 2016.)
More importantly, Nike has already built its presence. The company’s established position in the global athletic apparel and footwear market means it can return some value to shareholders.
As a matter of fact, the company started rewarding income investors decades ago. The latest dividend hike came last month, when the company’s board of directors declared a quarterly cash dividend of $0.18 per share, representing a 13% increase from its previous dividend. (Source: “Nike, Inc. Announces 13 Percent Increase In Quarterly Dividend,” Nike Inc, November 17, 2016.)
Moreover, Nike has been raising its dividend every single year for 15 consecutive years. Over the past 10 years, Nike stock’s quarterly payout has increased by 291%.
Fifteen years of consecutive dividend hikes make NKE stock special. This is because, while Nike is a consumer goods giant, its products are not consumer staples. Rather, it is in the consumer discretionary business, meaning its products are not considered necessities by consumers.
If a company’s products are considered everyday essentials like toothpaste and toilet paper, the demand for them would be relatively inelastic to the overall economic environment and the company can afford to keep raising its payout. Procter & Gamble Co (NYSE:PG) is a good example. But, as a company that sells basketball shoes, future demand might not be that easy to predict.
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That’s why NKE stock is special. Over the past 10 years, our economy went through the Great Recession, which is considered by many to be the biggest downturn since the Great Depression. But, even when many other consumer discretionary companies saw their business decline in that recession, Nike stock never stopped raising its payout.
Paying a dividend is not the only way for the sportswear giant to return value to investors; Nike is also buying back its shares. Right now, it is pursuing a four-year, $12.0-billion program announced in November of 2015. By the end of August 2016, the company had purchased 39 million shares under the program for approximately $2.2 billion.
The Bottom Line on NKE Stock
At the end of the day, don’t forget that, when looking at a company’s growth potential, we should also take into account its valuations. While Nike stock might not be as attractive as Under Armour stock from a growth prospective, NKE stock has a forward price-to-earnings (P/E) multiple of just 18.75 times, which is less than half of UA stock’s forward P/E of 44.49 times.
Given the company’s ability to return value to investors and its attractive valuation, I’d say Nike stock could still deserve a spot in an income investor’s portfolio.
