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Nike Inc.: Forecasting A November Dividend Increase

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About: NIKE, Inc. (NKE)
by: BOOX Research
Summary

NKE has increased its quarterly dividend rate every year since 2002.

The company reported a record quarterly profit for its fiscal Q1 and a steady growth outlook suggests room for future dividend increases.

The article includes our dividend forecast and discusses trends in the payout ratio.

Nike Inc. (NYSE:NKE) has consolidated its lead as a global footwear and apparel brand becoming a reference for marketing and design while blurring the lines between athletics and contemporary fashion. The stock has been a big winner in the market, up nearly 80% in the past two years driven by steady growth and firming margins. Nike recently reported its fiscal Q1 earnings which presented a record quarterly profit sending shares to a new all-time high. The company has embraced investor-friendly policies with an ongoing share buyback plan and a dividend growth history with 17 consecutive years of increasing the quarterly rate. This article covers our dividend forecast which we expect to be announced in November and trends in the payout ratio. The stock currently yields 0.95%.

Source: FinViz.com

Nike Dividend History

Nike currently pays a $0.22 per share quarterly dividend which represents a $1.37 billion annual payout. The company has a history as a dividend payer going back to 1986 although it was in 2002 when it announced the first in what has been 17 consecutive years of annual dividend rate increases. Over the period, as NKE shares have undergone a 2 for 1 stock split three times including most recently in 2015. Considering the adjusted per share amount, the dividend rate has increased by a factor of 12.5x, with an average annual increase of 17.7% over the period. Indeed, NKE is a great example of the long-term value of a quality dividend growth stock.

Source: Company IR/table by author

Taking a look at the dividend history, we note the following patterns in the timing of NKE's annual dividend increase:

  • NKE has declared a rate hike on the third Thursday of each November going back to 2009.
  • Record date is typically set first or second Monday workday of December since 2002, being the first Monday of the month since 2016.
  • The payment date for the dividend announced in November is typically the first business day of the next new year with just two exceptions being in 2012 and 2010 where it accelerated the payment into December.

A trend in the market is for greater transparency and consistency in the timing of the dividend with the recognition that many investors rely on the distribution as part of a regular income stream. In this regard, NKE really sets the standard with its consistent payout schedule. There's not much mystery and based on the above pattern, we forecast NKE will announce its next dividend on Thursday, November 14th. We expect the record date to be Monday, December 2nd and the payment date should fall on Thursday, January 2nd. Potential investors need to buy shares prior to the ex-date which based on our forecast would be November 29th to receive the payout.

Nike 2019 Dividend Rate Increase Forecast

Nike doesn't have an official dividend policy statement and based on a search through annual reports and conference call transcripts is not a topic often discussed other than management comments in dividend-related press releases noting that the dividend reflects "continued confidence in NIKE’s ability to deliver sustainable, profitable, capital-efficient growth over the long-term.”

Still, the numbers here speak for themselves and in contrast to other dividend-paying companies, the payout ratios on common financial metrics have generally been pretty steady over the past decade. We describe Nike's dividend as representing an average payout on earnings of about 33% over the past decade. The dividend payout in terms of free cash flow has averaged 36% in the past five years.

We note that in contrast to free cash flow that has presented higher levels of variance on a year-to-year basis, EBITDA among the three metrics, has grown at a steadier rate. It appears the payout ratios on EBITDA and earnings have trended slightly higher over the past decade. Overall, regardless of which metric takes priority, the dividend is well supported by earnings and recurring cash flow highlighting the payout safety.

Source: Data by YCharts/table by author

Going back to the dividend history table, Nike has done a $0.02 increase to the quarterly rate for each of the past five years. Without being dramatic, the question here becomes whether investors should expect another 2-cent increase or if Nike will go bigger. The safe bet here is to expect another 2-cent increase to a new quarterly rate of $0.24 per share, but there's also an argument for why the company can and should do a 3-cent increase to $0.25.

Source: Image source

First, we highlight that the annual increase in percentage terms has trended lower in recent years. A new rate of $0.24 per share, representing a 9.1% hike would be the first increase below double digits since fiscal year 2010. A 3-cent hike to $0.25 would be a 13.6% increase in the quarterly rate and frankly looks better as a round $1.00 per share for the full year. Management could use the more generous figure to present a positive outlook for the firm.

Source: Data by YCharts/chart by author

The other point favoring a bigger increase is the implication to the dividend yield which currently at 0.95% is at the lower end of its historical range which makes the stock appear expensive or richly priced. A hike to a new dividend rate of $0.25 would push the forward yield on the stock to 1.1% giving the stock the appearance of more value at least based on this relative metric.

Chart Data by YCharts

NKE Analysis And Forward-Looking Commentary

We are confident the dividend increase will be at least 2 cents but see it as very possible the company will go to 3 cents and give it a 50% probability either way. The difference between a new quarterly rate of $0.24 or $0.25 is a $62.4 million cash expense for the company for the full year which for context compares to the current free cash flow annual rate of about $4 billion per year and a balance sheet cash position of $3.6 billion. Basically, there is room to go higher.

The case for a more vanilla 2-cent rate hike is that management would play more conservatively pointing to the ongoing large share buyback program. During the quarter that ended August 31st, NIKE repurchased 11.9 million shares for approximately $995 million as part of its four-year, $15 billion program approved by the Board of Directors in June 2018. Considering the current annual dividend payout of about $1.4 billion, the buyback authorization represents about 3.6x the dividend over the four years. It appears Nike favors the flexibility of buybacks compared to a dividend.

Looking ahead, if not this year, Nike will eventually need to up the dividend increase beyond 2 cents as the payout ratios based on forward consensus earnings estimates would trend noticeably lower. The market sees NKE growing EPS from $2.49 in fiscal 2019 to $4.018 by fiscal 2022. The estimates here see earnings growing about 15% for each of the next three years, implying the annual dividend increase will need to keep up to maintain a stable payout ratio.

Chart Data by YCharts

Takeaway

Investors can expect a dividend rate hike by Nike in November. Officially, we are forecasting NKE to increase the dividend by $0.02 per share representing a 9.1% increase to a new quarterly rate of $0.24. This compares to an increase of 10% last year and would be the lowest rate hike in percentage terms going back to 2010. The reason we see the company taking the conservative route this year is that NKE is on track to become a dividend aristocrat in the next decade and a smaller dividend increase here ensures it can reach that milestone of 25 consecutive annual dividend increases while not pressuring its financial position in the near term. We will save a full analysis and our views on where the stock is headed next for a future article but for now, considering our favorable view of the company and its positive growth outlook, we currently rate NKE as a Hold.

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.