Nike: An Emerging Markets Dividend Play

| About: Nike Inc. (NKE)
This article is now exclusive for PRO subscribers.


Nike's emerging market story is starting to show financial returns for the company.

The increasing trend to leisure and fitness activities by emerging market consumers will bode well for Nike's long term growth.

While Nike has a small dividend yield, the company has shown a willingness to rapidly increase its dividend which may suit investors with a long term income horizon.

Nike (NYSE:NKE) is one of the 30 dividend stars that I'm currently steadily accumulating through my Dividend Accumulation Motif. This is a high quality business that never seems to be priced cheap, but a recent pullback in the price of the stock may recommend it for accumulation by patient, long term investors.

Brand and innovation leadership

Nike's continuous product innovation and marketing strategy have afforded the company strong brand loyalty in the eyes of the consumer. This allows the company to price at a premium compared to its competitors and maintain market leadership. Nike has displayed a willingness to experiment with new materials and new designs. It's a company that is looking to embrace the trend towards "quantified self", with experiments such as the Nike Fuelband. This is a company that will continue to lead what is possible in athletic equipment and footwear.

Nike has seen the financial rewards from its innovation and marketing discipline. The company has grown revenues by an average of 8.5% over the last decade. Earnings per share have tripled over the same time period, increasing at an even more impressive rate of 13% annually. Nike's earnings power and high returns are largely a function of superior returns on invested capital. Nike has averaged returns on invested capital that exceed 20%, with returns on equity that have also exceeded 20%. The company has demonstrated that it's consistently able to put capital to work and derive superior returns from this investment.

Nike's US strength now successfully leveraged in emerging markets

While the US is still the dominant source of revenues for the business, Nike now represents a solid emerging markets story for investors. Nike's brand is an aspirational one globally, particularly so in emerging markets. Nike's use of globally recognized celebrities and superstars create a cohesive global branding story which has been critical element of its success internationally.

What has become evident is that as disposable incomes increase in these emerging markets, sporting and fitness activities will increase as consumers embrace leisure activities and personal development. Given Nike's brand has global recognition in this category, it makes sense that it will benefit.

This is a trend that is playing out in Nike's most recent Q3 2015 results, particularly in the economies of China and Eastern Europe. Greater China is starting to be a more substantial contributor to Nike's business performance, and accounted for almost $1B of Nike's $7.5B quarterly revenue or just under 14% of revenues.

More impressive was the growth rate of the business in China. Greater China grew almost 33% in aggregate year on year on an organic basis, in spite of clear evidence of slowing macro growth in the Chinese economy. What is becoming apparent is that Nike's brand power is making its athletic merchandise a must have luxury good for Chinese consumers interested in athletics and fitness, even in uncertain economic times.

Similar results were seen in Central and Eastern Europe, which also saw rapid growth, of an admittedly much smaller base. Year on year revenue in central and eastern Europe grew some 29% in the quarter on an organic basis.

Emerging markets contributed to just under 30% of Nike's total revenues. With the Olympic games coming up in Brazil, Nike will likely see continued strength in these emerging markets leading up to the games and in the period shortly thereafter as its marketing engine goes overdrive.

While emerging market economies will go through stops and starts given the more volatile nature of their economic growth patterns, Nike appears to have established a solid beachhead for long term growth in these economies.

Dividend growth will be powered by emerging markets success

Nike offers a dividend yield of approximately 1%, which is too low to get the attention of most investors. However for those interested in the prospects of capital growth and substantial longer term dividend income, Nike appears to be a compelling prospect.

Nike has grown its dividend at a rate of over 17% annually over the last decade. Nike most recently hiked its dividend close to 14%. With the company's emerging market story just starting to unfold, Nike should be a growth story for at least the next decade with future profitability tied solidly to success in emerging markets.

For the dividend investor who is interested in the prospect of strong capital growth and has some time to wait for a rising dividend income stream, Nike represents a candidate worthy of consideration.

Disclosure: I am/we are long NKE.

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.