Nike: A Quick And Realistic Dividend Discount Model

Aug.27.14 | About: Nike Inc. (NKE)


Nike currently has a dividend yield of 1.23%.

Nike is currently trading at a P/E ratio of 20.17.

According to my valuations, Nike is trading at a discount of approximately 19%.

Quick Overview

Nike (NYSE:NKE) is one of the most iconic brands that is not only widely known in the United States, but on a global scale as well. Given their recent sell-off from January to February, and from the end of March to the end of April, investors have seen minuscule returns YTD, while prices try to break the $80.00 psychological level.

The World Cup has ended, but as Jared Billings states, there is no need to worry if there is no immediate World Cup sales bump.

Furthermore, there are worries that Nike's golf product line may see flat or slight decreases in sales; however, I beg the differ. I see Nike's new rising star, Rory Mcllroy, as a beneficial future driver for golf-related product sales.

Valuation and Projections

Following news that Nike should have a good year given the lagging revenue boost from the World Cup, and their endorsement of Rory Mcllroy, I've decided to run a simple DDM (Dividend Discount Model) valuation, as it may be insightful in terms of demonstrating what an investor can expect from Nike. All data are independently composed by using Nike's 10-K for the corresponding years.

Below is their 6-year historical PRAT (profit margin, retention rate, asset turnover, and financial leverage), with corresponding averages and ROE as well.

The dividend growth rate was calculated as: retention rate x PM (profit margin) x AT (asset turnover) x FL (financial leverage).

Click to enlarge

Notice I didn't use a tradition discount model where an assumption is made that there is an absolute linear decline in dividend growth until the Gordon model dividend growth rate. This is where one would calculate the expected dividend growth rate, and the growth rate given a Gordon Growth Model, then thereafter calculating rates between Y1 and Y5 using linear interpolation.

I assume that Nike is looking out for their shareholders and will place disposable cash into increasing dividends at a steady rate until halfway between the initial year and the terminal year in which dividend growth will decrease at an incremental rate, finally hitting the Gordon Growth Model terminal dividend growth rate of 17.07%.

Below is required rate of return for NKE.

My calculation of the expected risk-free rate is a little unorthodox; however, looking at a historical chart of 10 year yield, I've noticed that it usually takes on average approximately 7.5 years to raise 100bps. Therefore in 10 years, we have a rise of 133.33 bps. With the current yield of 2.40%, this would equate to an assumed risk-free rate of 3.73%

I decided to use the average annual change in Dgr (Dividend growth rate), and project this growth to calculate corresponding future dividends and thereafter use linear interpolation to determine year 4, leading to the Gordon Growth Dgr of 17.07%. For the sake of further explanation, we will call this average annual change in Dgr as 'c'.

The formula for future dividend growth until DPS(3) is

Given this, below is the calculation for the Intrinsic value of Nike's common stock (per share) assuming the it starts with an initial rate in DPS(0) of 15.04% (the average Dgr given the historical 6-year PRAT model).


From my analysis, I conclude that the intrinsic value of Nike's common stock (per share) should be priced at $92.91, furthermore, at its current price, Nike has potential upside of 23.73%, and is currently trading at a discount of 19.18% from my calculated intrinsic value.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.