Adding Nike To Our Dividend Growth Portfolio

| About: Nike Inc. (NKE)
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Summary

Nike has raised dividends for the past 15 years.

The average raise over the past 5 years is 15.6%.

I find shares to be almost 10% undervalued.

We added the stock to our portfolio on Friday.

After spending considerable time in recent days on this website stating I didn't want to expand my wife's and my dividend growth portfolio until we had built up our smaller positions, I, of course, went ahead and did just that by purchasing shares of Nike (NYSE:NKE) on Friday. Nike is now our 36th position and was one of the positions I had said that I was looking to add in 2017 (you can read the article here). I truly want to spend most of our Roth IRA contributions building up as many current positions as possible, but I found the value of Nike to be too good to pass up.

Nike is the largest and most dominant company in the world when it comes to footwear and athleisure. S&P Capital says the company made more than $32 billion in fiscal year 2016. Led by Nike and Jordan brands, shoes accounted for 65% of revenues. 30% of revenues came from apparel and 5% from equipment. Nike is truly a global company as more than half (53%) of 2016 revenues were from outside the United States. The stock has struggled since the start of 2016. The S&P 500 is up more than 11% since then while Nike is down more than 15%. Competitors, such as Under Armour (NYSE:UAA), have started to eat into Nike's market share. Nike has long enjoyed an elevated price-to-earnings multiple because of this dominance. Investors fear that if the company continues to face intense competition, earnings will be impacted and the stock could fall more. Hence the large drop when the S&P 500 has had a nice gain.

When a company I follow suffers such a dramatic loss, it peeks my interest. I'm not really concerned with short-term losses as buying shares of quality stocks don't go on sale every single day. I want to own the very best companies in the world because it will be the dividends from those companies that cover our expenses in retirement. Nike has an AA- credit rating from S&P and A1 from Moody's. Since I am looking for BBB+ and Baa, respectively, these ratings are more than fine. According to Value Line, the company enjoys an A++ financial strength and a 1 for safety. Folks, there is no higher rating for either of these categories. When I add a company to our portfolio I want to make sure that it is on a sound financial footing. If not, then the company could be in trouble which could have a negative impact on its ability to pay and raise dividends. By all of these measures, Nike more than passes muster.

As far as dividends, Nike has raised its dividend every year for the past 15 years. Its most recent dividend raise was a 12.5% raise this past December. According to David Fish's U.S. Dividend Champions excel spreadsheet, the 3, 5 and 10-year dividend growth rates are 15.1%, 15.6% and 14.7%, respectively. That is pretty robust as well as consistent dividend growth. This helps to make up for the fact that Nike's yield as of Friday was just 1.36%. For those looking for income, this probably isn't the sexiest stock. Since we are 20 or so years away from retirement, I don't mind trading a little yield for dividend growth, especially if I think shares are currently undervalued. Which I do.

The following table shows the criteria I used to determine how over or undervalued a stock currently is.

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

$60

$57.20

$58

F.A.S.T Graphs Current PE

F.A.S.T Graphs 5-Year Avg PE

Purchase Price

23.5

24.3

$52.41

On Friday, we purchased shares of Nike at $52.41. At that time, F.A.S.T Graphs gave a price-to-earnings ratio of 23.5. The company's 5-year average was 24.3. By this, shares were 4.29% undervalued. S&P Capital has a 12-month price target of $60, which was a 14.48% discount to purchase price. Its fair value was $57.20 or 9.14% above where I purchased the stock. Morningstar listed fair value as $58 per share. By this measure, Nike is trading at 10.67% discount to where I bought shares. Average these numbers together and I found Nike to be 9.64% under fair value at the time of purchase. An opportunity to add a high powered brand at such a discount was too good to pass up, even if it meant expanding our portfolio again.

Conclusion

While I didn't intend to start the year expanding the number of positions we held in our portfolio, I found that Nike was trading at too sweet a valuation to pass up. The company is one of the most recognizable brands in the world, even if investor sentiment is currently against it. Nike is in a very strong financial position and has shown a willingness to reward shareholders with double-digit dividend raises. I am happy to add the company to our stable of dividend paying stocks. What do you think of our pick?

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.

Additional disclosure: We are not investment professionals. Please do your own research prior to making an investment decision.