Last month, the World Bank drastically cut its global GDP growth forecast for 2022. The Washington, DC-based institution forecasts global GDP growth of 2.9% this year. For context, this is only half of the 5.7% global GDP growth recorded in 2021 and well below the 4.1% estimate announced for 2022 in January.
Unsurprisingly, this contributed to the growth orientation Nasdaq Compounddown 24% since the start of the year. Shares of the dominant footwear and apparel company Nike (NKE 2.40%) did even worse – down 35%. This begs the question: could buying Nike stock be a drag on growth investors at the current share price? Let’s dive into the fundamentals and valuation of Nike to find out.
Nike saw sales and profit growth despite setbacks
Nike released its results for the fiscal year 2022 on June 27. Revenue and diluted earnings per share (EPS) increased slightly for the year.
The company posted total revenue of $46.7 billion in the fiscal year, up 4.9% from a year earlier. This growth rate is lower than its five-year revenue growth rate of 6.3%.
But given the supply chain challenges Nike faced during the year that negatively impacted total revenue, that doesn’t indicate the company’s fundamentals are getting any better. deteriorate. According to Chief Financial Officer Matthew Friend, Nike launched its new enterprise resource planning system in China this month and plans to roll it out to North America in the next fiscal year. The company is therefore confident that it should be able to better adapt to supply chain challenges in the future.
The biggest win for Nike in fiscal 2022 was the 14.4% year-over-year growth of its direct-to-consumer and digital sales channel called Nike Direct. Revenue jumped to $18.7 billion, taking its share of Nike brand sales to 42.1%. This more than offset the 1% drop in Nike brand revenue from wholesale customers of $25.6 billion for the year.
The growing momentum of its direct-to-consumer and digital channel will have two major benefits for the company in the coming years: higher margins and less reliance on its wholesale customers.
Nike generated $3.75 of diluted EPS during the year, up 5.3%. Along with the increase in total revenue, the company’s improved operating efficiencies helped to slightly increase its net margin to 12.9%.
Nike’s thriving direct-to-consumer and digital channel is why analysts estimate the company will deliver 13.4% annual earnings growth over the next five years.
Future dividend growth is expected to remain high
Nike is doing well from a fundamental perspective. This should also translate into strong dividend growth in the years to come.
Indeed, the company’s dividend payout ratio was just over 30% in fiscal year 2022. This means that Nike has the financial flexibility to reinvest capital into its business, pursue acquisitions, buy back shares and repay debt. And it also means that Nike has a significant buffer to continue paying its current dividend in the event of a temporary drop in profitability. This is why I believe that the low double-digit growth in the annual dividend will persist in the medium term. This more than compensates for the fact that Nike’s 1.1% dividend yield is significantly lower than the S&P500 return of 1.6% of the index.
The stock is not extremely cheap or expensive
Nike appears to be fully valued at its current price of $108 per share. This is supported by a 12-month price-to-earnings (P/E) ratio (TTM) of 28.8. For context, that’s a bit higher than the company’s 10-year median TTM P/E ratio of 28.1. But the growing impact of Nike’s direct-to-consumer and digital channel on its sales arguably justifies a slightly higher valuation multiple than it has typically commanded in the past. That’s why buying the dip in Nike shares seems like a smart move for long-term growth investors.
Kody Kester has no position in the stocks mentioned. The Motley Fool holds positions and recommends Nike. The Motley Fool has a disclosure policy.