Published November 25th, 2016 by Bob Ciura
Nike (NKE) stock has taken a turn for the worse this year. After spending the past few years as one of the market’s growth stock darlings, Nike shares are down 25% from their 52-week high.
And yet, the company’s fundamentals remain very strong. Revenue and earnings-per-share continue to race higher.
Investors fear the impacts of slowing economic growth in the emerging markets and the potential for higher labor costs. In theory, this could eat into Nike’s future growth.
Meanwhile, when it comes to growth, Nike continues to just do it.
Nike is a member of the Dividend Achievers Index. To be a Dividend Achiever, a stock must have 10+ consecutive years of dividend increases (no small feat). You can see the entire list of all 273 Dividend Achievers here.
Nike recently raised its dividend 13%, marking the company’s 15th consecutive year of dividend growth. Here’s why dividend growth investors should be thankful for Nike’s share price decline this year.
Nike is a global apparel giant. It operates in five main operating segments:
- Footwear (60% of sales)
- Apparel (28% of sales)
- Equipment (5% of sales)
- Converse (6% of sales)
- Global Brand Divisions (1% of sales)
Within the Nike brand (excluding Converse), the company is diversified geographically. The Nike brand has a significant international presence:
- North America (48% of sales)
- Europe (26% of sales)
- Greater China (12% of sales)
- Japan (3% of sales)
- Emerging Markets (11% of sales)
Nike’s operational strategies have yielded tremendous results. It has added nearly $10 billion of new revenue in just the past five fiscal years.
Source: Fiscal 2016 Annual Report, page 7
Reaching double-digit annualized revenue growth in a slow-growth global economy is a major accomplishment that few companies can boast.
In fiscal 2016, Nike’s revenue growth slowed somewhat to 6% for the year. Investors seem disappointed by this, which would explain the declining share price.
But going forward, there is a very good chance Nike can return to double-digit revenue growth. Unfavorable foreign exchange fluctuations weighed down revenue last year. The strong U.S. dollar may ease going forward.
And, Nike is making great progress in new business areas to drive future growth.
Going forward, Nike’s growth prospects remain strong. The company has a proven ability to generate very high returns on capital.
Source: Fiscal 2016 Annual Report, page 7
This means that not only does Nike succeed at growing sales, but it also translates a high portion of its sales into profits for shareholders. And, Nike has expanded return on invested capital by more than seven percentage points in the past five years.
Two huge growth catalysts for Nike are women’s apparel, and e-commerce.
First, while Nike has traditionally catered to the men’s apparel segment, women’s apparel is a booming area.
In fiscal 2016, Nike saw double-digit growth across its men’s, women’s, and young athletes’ businesses. But the women’s business was the best performer, with a 17% sales growth rate last year.
Second, e-commerce is also an emerging growth area. Consumers are increasingly gravitating to online retail for the convenience of at-home shopping and delivery. Nike is responding to this changing consumer landscape by investing aggressively in its digital platforms.
In fiscal 2016, Nike.com grew 51% year over year. Nike expanded its reach to an additional 20 countries during the year, and is now present in more than 40 countries across the world.
Competitive Advantages & Recession Performance
Nike’s first competitive advantage is its brand strength. According to Forbes, Nike has the 18th most valuable brand in the world. Nike’s brand, including the classic ‘swoosh’ logo, are worth $27.5 billion.
When consumers think of shoes, they think of Nike. Nike’s brand strength is a huge competitive advantage, as it has allowed Nike to successfully take market share across a number of other apparel product categories.
Nike maximizes its competitive advantages through advertising. Nike spends more than $3 billion each year in advertising. Very few competitors can match this level of advertising, which gives Nike high rates of consumer retention and brand awareness.
These competitive advantages provide Nike with consistent profitability.
At first glance, one might think Nike is highly vulnerable to recessions. High-end, premium apparel is a natural choice for consumers to cut back on when times are tight.
However, that is not actually the case. Nike’s earnings-per-share through the Great Recession are shown below:
- 2007 Earnings-per-share of $0.72
- 2008 Earnings-per-share of $0.86 (19.4% increase)
- 2009 Earnings-per-share of $0.88 (2.3% increase)
- 2010 Earnings-per-share of $0.97 (10.2% increase)
It is very impressive for an apparel company to grow earnings-per-share each year throughout the Great Recession.
Valuation & Expected Total Return
One positive about Nike’s share price decline this year is that it has brought the stock back down to a reasonable valuation. Nike now trades for a price-to-earnings ratio of 22.
This is cheaper than the S&P 500 Index, which has an average price-to-earnings ratio of 25.
It seems Nike stock is undervalued. The company deserves a premium valuation, given its high growth rates.
Aside from expansion of the price-to-earnings ratio, future shareholder returns will be comprised of the following factors:
- 8%-10% revenue growth
- 1% margin expansion
- 2% share repurchases
- 1.3% dividend yield
Based on this calculation, Nike’s expected returns are 12.3%-14.3% going forward.
After Nike’s 13% dividend increase, the forward dividend yield is now 1.5% based on its recent closing share price. This is below the S&P 500 average dividend yield of 2%.
However, the income an investor can earn from Nike will surely catch up to the S&P 500 average over time. This is because of Nike’s repeated double-digit annual dividend growth.
During this time of year, investors should give thanks to the deals Mr. Market is dishing out this Thanksgiving.
Nike’s 25% share price drop is something dividend growth investors should be very thankful for. It provides a much more favorable valuation and sets up investors to earn strong returns going forward. The company has an above-average rank using The 8 Rules of Dividend Investing thanks to its excellent growth potential.