Revisiting Nike's Dividend Growth

| About: Nike Inc. (NKE)
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Nike (NYSE:NKE), the world's leading sporting goods company, recently announced its annual dividend increase. Here are some quick recaps from 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 "Dividend Contenders" list maintained by SA contributor David Fish.
  • The new dividend will be paid to shareholders in January 2014, with an ex-dividend date in December 2013.

This article was written in 2012 just before Nike's dividend increase and stock split were announced, debating by how much the dividend would be increased. Since Nike has increased its dividends twice since that article, it is time to look at the numbers again. Let us get into the details.

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

Current Dividend and Yield: The new dividend of $0.96 per share gives Nike a yield of 1.2%. Hang on a minute before you pass it along as being too low. This stock's investment thesis has much more than just the dividends.

Payout Ratio: The new payout ratio stands at 32%, which is more or less the same as what it was at the time of the previous article. Two consecutive double digit dividend increases haven't had much of an impact on the payout ratio and this speaks a lot about the company's earnings growth, which is covered below.

5 Year Dividend Growth Rate: The 5 year dividend growth rate remains at 14% as in the original article linked above.

Please note the dividend numbers above have been adjusted for the 2012 stock split. If you are a fan of charts and like to see a progression, you will love the one below. In the twelve years that Nike has been increasing dividends annually, the quarterly divided per share has grown eight fold from 3 cents to 24 cents. The dividend growth has been significant and will likely continue being so, backed up by the low payout ratio and the 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 yield on cost more than doubles for someone who sets his/her money aside for 10 years with Nike. Given Nike's low payout ratio, cash on hand ($6 billion), and low debt ($1.4 billion) this should be possible.

However, income potential is still a minor factor when it comes to Nike, as it is still a growth stock that also happens to pay a dividend. We profiled two similar stocks, Starbucks (NASDAQ:SBUX) and Visa (NYSE:V) recently. The tables below (Starbucks' first, Visa's second) are from those articles, to put Nike's dividend potential in perspective.

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

(Source: Finance.Yahoo.Com)

Nike is one of the few companies out there that has a clearly published growth strategy, which leads to new product categories. Nike recently announced plans to grow revenues to $36 billion by FY 2017, up from its target of $30 billion for FY 2015. In addition to growth strategies, Nike has also outlined financial goals including:

1) achieving 25% return of capital,

2) returning 25 to 35% of earnings to shareholders as dividends (targeting a manageable payout ratio), and

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

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

However, Nike has had a nice run up along with the rest of the market and the valuation isn't quite catchy right now, with a PE of 27 and PEG of 2. The forward PE of 22 seems a bit rich as well. If you are looking to enter this stock, we suggest waiting for a pullback before initiating a position in this stock. If you are holding it already, stay tight because you've got a long-term winner.

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