I love dividend growth stocks, but few income names impress me as much as Nike Inc. (NYSE:NKE).
Regular readers know I’m a big fan of a group of stocks I like to call my Dependable Dividend Growers. Because of their entrenched market positions, these companies crank out dividend hikes like clockwork. Investors bid up the price of shares roughly in line with the distribution, resulting in tidy returns for owners.
Nike represents one of my favorite examples. Over the past 15 years, the apparel giant has passed on steady dividend hikes to owners. Through the same period, shares have returned a tidy 894%.
Good news for owners, but bad news for those on the sidelines. Question is, should income investors put money to work in Nike after such an epic run? Let’s take a deep dive into this dividend.
The Dividend - Is it Safe?
Few people get the true genius of Nike.
The company cherry picks the parts of the value chain - research, design, and branding - that have the highest profitability. In turn, it contracts out the capital-intensive, low-return activities like manufacturing and retailing.
By focusing on the 20% of the business that generates 80% of the profits, Nike makes money hand over fist. Gross margins consistently top 40%. Each year, the company generates 40 cents of profit on every dollar of capital invested into the business. I can only think of a few businesses in the world that produce numbers like these.
For investors, that has created a cash machine. Nike has paid a distribution to owners every year since 1987. Over that period, the payout has grown nearly 300-fold.
Think about everything that happened over that time - Black Monday, the Iraq War, a dot-com bust, the real estate bubble, the financial crisis, and plunging interest rates. Yet through it all, Nike has always managed to send a check to owners.
That trend will likely continue. Today, Nike pays a quarterly distribution of $0.18 per share, which comes out to an annual yield of 1.2%. Given this dividend only amounts to one-third of annual profits, executives have lots of wiggle room if business sours.
The Dividend - Can it Grow?
While Nike has prospered for decades, the company's best days are hardly behind it. Executives have a “triple-threat” to keep profits (and by extension the dividend) growing.
First, slash costs. In June, the company announced plans to cut 2% of its workforce. Analysts estimate the move will eliminate 1,400 jobs and allow executives to implement new strategies faster.
Second, Nike recently unveiled its "Triple Double" project. This initiative calls for doubling its rate of innovation, speed to market, and connection to customers. By getting new products to the market faster, Nike hopes to beat out encroaching rivals like Under Armour Inc. (NYSE:UA).
Third, bet big on China. The country is set to surpass the United States as the world’s largest apparel market by 2019, with annual sales growing at a double-digit clip. As an incumbent player with a well established supply chain, Nike is poised to capture a big share of this pot.
For shareholders, all of these catalysts provide a big tailwind. Analysts project Nike will grow earnings per share at 12% annually over the next five years, according to numbers compiled by Reuters. The distribution could grow even faster if executives decide to increase the payout ratio.
The Dividend - What’s the Return?
At $56.00, new investors lock in a 1.2% yield. Assuming the company grows the dividend at an annual rate of 12%, that brings our total return from distributions alone into the low teens. You can certainly find better potential in other income stocks, but you usually don’t see returns this high from Grade-A names like Nike.
Of course, the Nike bull thesis could change. Athletic wear is the hot casual fashion today, but consumer tastes are notoriously fickle. The threat of more competition and any issues in China would clip profits.
That said, Nike has fared through much worse. And with a triple-threat of catalysts, the company has a lot of potential to grow earnings from here. For income investors looking to put money to work, Nike still deserves a place on your stock shopping list.
Disclosure: I/we 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.