Company Description: Nike, Inc. is the world's leading designer and marketer of high-quality athletic footwear, athletic apparel and accessories.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High-Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
NKE is trading at a premium to all four valuations above. The stock is trading at a 9.3% premium to its calculated fair value of $79.74. NKE did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
NKE earned two Stars in this section for 1.) and 2.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. The company has paid a cash dividend to shareholders every year since 1984 and has increased its dividend payments for 12 consecutive years.
Dividend Income vs. MMA:Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high-yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
NKE earned a Star in this section for its NPV MMA Diff. of the $2,387. This amount is in excess of the $2,300 target I look for in a stock that has increased dividends as long as NKE has. If NKE grows its dividend at 20.0% per year, it will take 7 years to equal a MMA yielding an estimated 20-year average rate of 2.98%.
Memberships and Peers: NKE is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. The company's peer group includes: Crocs, Inc. (NASDAQ:CROX) with a 0.0% yield, Deckers Outdoor Corporation (NASDAQ:DECK) with a 0.0% yield and Wolverine World Wide, Inc. (NYSE:WWW) with a 0.9% yield.
Conclusion: NKE did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks NKE as a 3-Star Hold stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $88.54 before NKE's NPV MMA Differential decreased to the $2,300 minimum that I look for in a stock with 12 years of consecutive dividend increases. At that price the stock would yield 1.0%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,300 NPV MMA Differential, the calculated rate is 19.9%. This dividend growth rate is below the 20.0% used in this analysis, thus providing a small margin of safety. NKE has a risk rating of 1.50 which classifies it as a Medium risk stock.
NKE is the largest and most dominant player in the athletic footwear and apparel category. Despite an increasingly competitive global marketplace and weak consumer spending in the U.S. and Europe, the company enjoys strong financial and operating metrics largely as the result of its dominant brand.
The company looks to increase its global markets and share by aggressively expanding into emerging markets. NKE is focused on meeting the needs of the more discerning and sophisticated Chinese consumers and is seeing significant growth in this important market. NKE continues to concentrate on adopting innovations to keep up with customer preferences.
Late September, NKE reported better than expected fiscal first quarter 2015 earnings per share of $1.09, up 27% from the prior year. The earnings improvement was the result of higher sales, improved margins, a lower tax rate and lower shares outstanding. The increased sales were the result of improved sports gear sales during the World Cup and a growing trend of wearing fitness clothing as everyday clothes. Also, the company is enjoying the gains from its global brand positioning initiatives. Management expects strength in sales and earnings per share to continue for the rest of the year.
The company enjoys strong financial, operating and dividend metrics. Its free cash flow payout 38% is well below my maximum 70%, while its debt to total capital of 11% is well below my maximum of 45%. The stock is currently trading above my calculated fair value of $79.74 and its current yield is well below my minimum, so for now I will remain on the sidelines.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion.
Full Disclosure: At the time of this writing, I held no position NKE (0.0% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.
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 (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.