Revisiting Nike’s Dividend Growth (NYSE:NKE)

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Nike (NYSE: NKE), the world leader in sporting goods, recently announced the annual increase in its dividend. Here are some quick recaps of the announcement:

  • The new annual dividend per share is 96 cents per share, up 14% from the previous 84 cents per share.
  • This is the 12th consecutive year that Nike has increased its annual dividend, firmly establishing itself in the list of “Dividend Contenders” maintained by SA contributor David Fish.
  • The new dividend will be paid to shareholders in January 2014, with an ex-dividend date of December 2013.

This article was written in 2012 just before the announcement of Nike’s dividend increase and stock split, debating how much the dividend would be increased. Given that Nike has increased its dividends twice since this article, it’s time to revisit the numbers. Let’s get into the details.

(Please keep in mind that Nike did a stock split in December 2012.)

Running Dividend and Yield: The new dividend of $0.96 per share gives Nike a yield of 1.2%. Wait a minute before passing it off as too low. The investment thesis of this stock has much more than dividends.

Payment Report: The new payout ratio is 32%, which is more or less the same as at the time of the previous article. Two consecutive double-digit dividend increases didn’t have much of an impact on the payout ratio, which says a lot about the company’s earnings growth, which is described below.

5-year dividend growth rate: The 5-year dividend growth rate remains at 14% as in the original article linked above.

Please note that the dividend figures above have been adjusted for the 2012 stock split. If you’re a fan of charts and like to see progression, you’ll love the one below. In the twelve years that Nike has increased its dividend each year, the quarterly split per share has increased eightfold, from 3 cents to 24 cents. Dividend growth has been strong and will likely continue to be, supported by the low payout ratio and earnings potential.

Extrapolation: The table below assumes an annual dividend growth rate of 10% for the first five years and 7% for the next five. The return on cost more than doubles for someone who puts their money aside for 10 years with Nike. Given Nike low payout rate, cash ($6 billion)and low debt ($1.4 billion) it should be possible.

However, earnings potential remains a minor factor when it comes to Nike, as it is still a growth stock that also pays a dividend. We profiled two similar stocks, Starbucks (NASDAQ:SBUX) and Visa (NYSE:V) recently. The charts below (the first from Starbucks, the second from Visa) are drawn from these articles, to put Nike’s dividend potential into perspective.

Earnings Growth: Nike is expected to grow 12% per year over the next 5 years according to analysts’ estimates. This rate is lower than the industry’s expected growth rate, but about 30% higher than the S&P 500 growth rate. If you don’t believe analysts’ estimates, read the next paragraph.

(Source:Finance.Yahoo.Com)

Nike is one of the few companies with a clearly published growth strategy, which leads to new product categories. Nike recently announced plans to grow revenue to $36 billion by fiscal 2017, up from its fiscal 2015 target of $30 billion. In addition to growth strategies, Nike has also defined financial objectives, in particular:

1) achieve 25% return on capital,

2) return 25-35% of profits to shareholders as dividends (targeting a manageable payout ratio), and

3) increase earnings per share in the mid-teens in percentage terms.

Conclusion: There is no doubt about the power of the Nike brand (24th in the world), its financial solidity, its wide moat and its earnings potential. The points presented above show that Nike is a unique stock like Starbucks and Visa that offers the right mix of growth, dividends, dividend growth and international exposure.

However, Nike has had a nice run up with the rest of the market and the valuation isn’t quite eye-catching right now, with a PE of 27 and a PEG of 2. The forward PE of 22 also looks a bit rich. If you are looking to get into this security, we suggest waiting for a pullback before opening a position in this security. If you’re already holding it, stay tight because you have a long-term winner.

Disclosure: I have no positions in the stocks mentioned and do not plan to initiate any positions in the next 72 hours. I wrote this article myself, and it expresses my own opinions. I don’t get any compensation for this (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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