Nike (NKE); Continued margin contraction offsets impressive dividend increase of 13%

Nike’s (NYSE:NKE) dividend was increased by 13% on November 21st. Its overall yield is under that of the S&P 500 Index, at 1.28%. The firm has paid a dividend since January of 1993.

Nike is the premier shoe production and designer in the world. The company maintains over 850 stores and sells through 50,000 retail accounts. It sells in over 175 countries worldwide. It also sells through  independent distributors. Nike brand sales within North America account for nearly half of sales. The balance comes from Europe at just under 20% of revenue and emerging markets.  China accounts for nearly 10% of overall sales. Nike sells in multiple categories such as footwear, apparel, and accessories. Its primary brand is Nike but also has a popular Jordan line of product.  The multiple sports it concentrates on are running, football, golf, training, and basketball. The firm also markets apparel to colleges and professional sports teams.

Nike has maintained a stellar three-year growth rate of dividends of 13.5 percent. The firm is only paying out 22% of its earnings in dividends, offering potential for further double-digit increases in the future. Nike currently ranks 2nd in yield within the large cap consumer goods, apparel, footwear & accessories category.  The quarterly dividend for the January payment will be $0.18 versus the prior year rate of $0.16 per share. Nike Inc. is not a member of our Top 100 Dividend Stock List (see below).

The dividend will be paid at the new higher rate on January 3, 2017, to shareholders of record at close of business on December 5, 2016. Nike is currently priced at $51.10. Listed in the table below are the quarterly dividend payments since 2010.

Date Quarterly Dividend
12/5/2016 0.18
9/1/2016 0.16
6/2/2016 0.16
3/3/2016 0.16
12/7/2015 0.16
9/3/2015 0.14
5/28/2015 0.14
2/26/2015 0.14
12/11/2014 0.14
8/28/2014 0.12
5/29/2014 0.12
2/27/2014 0.12
12/12/2013 0.12
8/29/2013 0.105
5/30/2013 0.105
2/28/2013 0.105
12/6/2012 0.105
8/30/2012 0.09
5/31/2012 0.09
3/1/2012 0.09
12/1/2011 0.09
9/1/2011 0.077
6/2/2011 0.077
3/3/2011 0.077
12/2/2010 0.077
9/2/2010 0.068
6/3/2010 0.068
3/4/2010 0.068

Quantative Analysis of Nike

Category Value Score
Dividend Yield 1.28% 361
Dividend Growth (3 to 6 year avg) 13.9% 151
Forward P/E 19.08  184
S&P Financial Rating AA- 40
Beta 0.85 100
Total Score   836
% Yield 3 Year Div. Growth Rate 6 Year Div. Growth Rate SPS 2016 P/S Ratio 10 yr P/S Low 10 yr P/S High 5 yr lowest Yield % 5 yr max Yield %
1.28% 13.5% 14.3% 24.2 2.44 1.37 2.75 0.85% 1.52%

Positives;

  • Nike maintains a credit rating of AA-. This is investment grade.
  • Nike  has paid out a dividend consecutively for the last 23 years.
  • Nike maintains a beta of 0.85, much lower than the average company.
  • Nike current dividend yield (1.28%) is slightly above its five-year average historical dividend yield of 1.19%.

Negatives;

  • Nike is trading at the top of its ten-year average price/sales (P/S) average.
  • Nike dividend yield is below that of the S&P 500 Index.
  • Nike forward P/E ratio is just over 19, above that of the market.

Latest Earnings & Overall Analysis:

Nike stock dropped 4% after released earnings back on September 27th. Earnings per share for the large foot-ware firm were $0.73 for Q1 of 2017, up 9% year-over-year. Revenues climbed 8% to $9.1 billion, which was 10% higher than last year’s number excluding currency effects. Strong growth of double-digits came from China, Europe, and Emerging markets.  Growth in China was especially robust, rising by 21% to just over $1 billion in revenue. Investors were unimpressed by the overall quarter despite the growth. Growth was a mere 6% year-over-year increase in NIKE Brand North American sales at $4.03 billion. Also noteworthy were gross margins. Nike’s gross margins fell to 45.5% from 43.5%. Gross margins were impacted by the negative currency trends, its poor performing golf segment, and higher operating expenses. A few other highlights included Converse, acquired over a decade ago. The old-line brand produced a revenue gain of 4%.  During Q1, Nike continued to also buy back stock. The firm repurchased a total of 19.0 million shares for approximately $1.1 billion as part of the four-year, $12 billion program approved by the Board of Directors in November 2015.

Future orders were projected at 7% for Q2, much lower than the expectations for 8-11% range. Revenue growth projections were below future orders at mid-single digits. Future progress on gross margins was also negative, with an expectation by management of more contraction by about 1.25%.   Shares of the firm have fallen from $62 at the beginning of 2016 to start of the year to just $51.37 today. It has been one of the worst stock performers in its category year-to-date.

There is no doubt that Nike is the most dominant player and leading company in its category.  Its depth of products, size, brand loyalty, and major sponsorships with leagues, teams, and players is top notch. The firm has about a quarter of the market share in the global foot-ware industry. The next closest competitor is Adidas at under 10%.  Despite the competition from Adidas and Under Armour, Nike can still price their products at a premium level. But this advantage may by waning, especially since Under Armour came on to the scene.

Nike stock is now more reasonably priced, trading at 19.3 times next year’s earnings estimate of $2.69 per share. Considering that Adidas trades at over 20 times earnings while Under Armour trades at a forward price/earnings ratio of 44, Nike does offer a much more reasonable valuation.  But its competitors are growing faster. Adidas has profited from it move to a more “old school” shoe development. Under Armour grew shoe revenues as much as 58% year-over-year, powered by the signing of Stephen Curry. And, although the Curry shoe seems to be fading with sales of the Curry 3 down, the firm is now a major competitor against Nike.

Nike is a strong company with a solid dividend growth rate, excellent balance sheet, and moderate beta.  However, Nike does not qualify as a member of our Top 100 Dividend Stock List.  The firm now has stiff competition from both Adidas and Under Armour. From a stock perspective, it also maintains a low yield versus the market, high price/earnings ratio, high relative price/sales ratio, and continued concerns about margins and future earnings growth in 2017.

 nke3

Nike Inc. Dividend Yield Chart (Click to enlarge)

Chart Explanation:  Dividend growth stocks may be viewed favorably when the current yield is above historical readings for the past 5 years.

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