Nike is the market leader in athletic shoes and clothing. After starting in Oregon, the company expanded its product line and operations across the United States and worldwide. Today, Nike is a giant generating tens of billions in revenue but still growing. Rising income and profit suggest the firm will continue to reward shareholders with dividends. Nike is an excellent business and fits the late Charlie Munger’s philosophy, “a great business at a fair price is superior to a fair business at a great price.” However, the stock seems richly priced now, and investors may want to wait for a better entry point.
Overview of Nike
Nike was founded in 1964 by track & field athlete Phil Knight and his coach Bill Bowerman. The company first operated as a distributor for a Japanese shoe company, mainly selling at track meets. From there, it grew into designing and selling its products, and by 1980, it had 50% of the U.S. athletic shoe market. Next, it expanded to other sports globally.
Today, Nike is the world’s largest athletic shoe and apparel company. It sells online, through its stores, and via other retail chains. Besides Nike, it owns the Converse brand. Major trademarks include Nike, Converse, Air Jordan, All-Star, Chuck Taylor, etc. Interbrand says Nike is the 9th best brand.
Total revenue was $51,217 million in the fiscal year 2023 and $51,469 million in the trailing twelve months.
Selected Data for Nike (NYSE)
| Ticker | NYSE |
| Market Cap | $176.4 billion |
| Stock Price | $115.91 |
| Dividend (FWD) | $10.48 |
| Dividend Yield | 1.28% |
| P/E Ratio (FWD) | 31.2X |
Source: Data from Portfolio Insight (as of December 10, 2023)
Nike’s Dividend and Dividend Safety
Dividend
Nike began paying a dividend 22 years ago, placing it on the Dividend Contender 2023 list. Despite the long history, the growth rate is still in the double digits. The trailing five-year growth rate is about 11.1% on average, and the ten-year rate is slightly greater at ~12.8%. The current dividend rate is $1.48 per share. Based on consensus earnings per share, the calculated payout ratio is 40%, meaning investors should expect more increases in the future.
The forward dividend rate results in a dividend yield of ~1.28% at the current stock price. It seems low, but this percentage is more than the 5-year average of 1.01% because of the slight decline in share price this year. Nike recently hiked its dividend on November 16, 2023. Investors should expect another increase late in 2024.
Dividend Safety
Nike has outstanding dividend safety metrics based on earnings, free cash flow (FCF), and debt.
The forward earnings payout ratio is excellent at approximately 40% based on the annual dividend rate of $1.48 and estimated earnings of $3.72 per share. This value is attractive and lower than our desired quantity of 65%.
Next, the dividend rate’s coverage by FCF is solid. In the last twelve months, FCF was roughly $4,460 million. The dividend required $2,056 million, resulting in a dividend-to-FCF ratio of around 46%. Our target value is less than 70%, so little risk exists for a dividend cut.
Although Nike has increased its debt in the past year, the balance sheet is sound. At the end of Q3 2023, Nike held ~$8,790 million in cash, cash equivalents, and short-term investments on its balance sheet. In addition, the firm had $6 million in short-term, no current long-term debt, and $8,929 million in long-term debt. Hence, the company has sufficient cash on hand to meet its debt obligations. The leverage ratio is near zero, and interest coverage is 20X+.
Nike has an excellent AA-/A1 high-grade to upper-medium investment credit rating. The dividend quality grade is an ‘A+,” meaning it is in the 95th percentile of dividend paying stocks.
Competitive Advantage and Risks
As the most prominent athletic footwear and apparel company, Nike has several competitive advantages related to scale, giving it cost and supply chain efficiencies. Although the barrier to entry is not high, new entrants will face elevated costs and lower efficiencies.
Next, Nike has demonstrated that its brand and business model can expand globally to China and Europe. In fact, the firm has about 38%+ of the global market share. It spends prodigiously on advertising and marketing to maintain brand awareness. Nike’s brand strength also makes it the company most athletes want to partner with, reinforcing the brand.
Lastly, Nike continually updates its footwear and clothing lines, keeping them relevant. Innovations are also implemented quickly.
The main risk for Nike is competition. Although it has a strong brand, marketing, and distribution, there is essentially no barrier to entry for new entrants. Also, many competitors exist, including Adidas, Reebok, Under Armour, Puma, New Balance, and smaller companies. Outsourced manufacturing makes it reasonably simple for new entrants to emerge, and some, like Hoka and On, have achieved success in niche markets.
Another risk is that Nike is dependent on overseas contract manufacturing. Footwear and apparel are subject to tariffs that countries can change. In addition, a global supply chain can be disrupted.
Valuation
Nike usually trades at an elevated share price of 25 times earnings because of the stock’s popularity and growth. Despite many years of operation, Nike continues to increase the top and bottom lines at a decent clip. The forward earnings multiple is ~31.2X, near the higher end of the 5-year and 10-year ranges. Investors interested in this equity may want to wait for a better entry point.
Disclosure: Long NKE.
Disclaimer: The author is not a licensed or registered investment adviser or broker/dealer. He is not providing you with individual investment advice. Please consult with a licensed investment professional before you invest your money.
Author Bio: Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 2.5% out of over 26,000+ financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.
