NIKE, Inc.'s ( NYSE:NKE ) investors are likely not happy with the stock's performance in 2021, as it has been lagging the broad market by a fair bit. However, stock positively surprised on the latest earnings report. As we are waiting for the next earnings report that lands in two weeks, in this article we will take a look at the latest news and examine 3 factors that make the dividend: growth, volatility, and the payout ratio.
Apparel brands are engaged in a frustrating game of supply chain whack-a-mole . After moving out of China, to avoid tariffs but also rising production costs, the producers are now looking for alternatives to Vietnam. Covid-related shutdowns hit domestic production hard, particularly Nike, which produces over 50% of its footwear in that country. However, due to the 6-month lead time, it seems that the holiday season stock will not suffer shortages.
Meanwhile, the decision to shut down the US head office for a week is receiving praise all over the media. One-week breaks are becoming popular as burnout prevention measures. The companies that joined this trend include LinkedIn, Bumble( NASDAQ: BMBL ), and Hootsuite.
- EPS: US$1.11 (y/y growth 16.84%)
- Revenue: US$12.56b (+18.54% q/q)
- Full-year Zacks Consensus Revenue: US$50.04b
A 0.7% yield is nothing to get excited about, but investors probably think the long payment history suggests NIKE has some staying power.
There are a few simple ways to reduce the risks of buying NIKE for its dividend, and we'll go through these below.
1. Payout ratios
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut.Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable.
NIKE paid out 29% of its profit as dividends over the trailing twelve-month period.This is a medium payout level that leaves enough capital to fund opportunities that might arise while also rewarding shareholders. One of the risks is that management reinvests the retained capital poorly instead of paying a higher dividend. However, examining returns on capital, we can see that they are reasonably high.
We also measure dividends paid against a company's levered free cash flow to see if enough cash was generated to cover the dividend.NIKE paid out a conservative 27% of its free cash flow as dividends last year.It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
While the above analysis focuses on dividends relative to a company's earnings, we note NIKE's strong net cash position, which will let it pay larger dividends for a time, should it choose.
Remember, you can always get a snapshot of NIKE's latest financial position by checking our visualization of its financial health .
2. Dividend Volatility
For this article, we only scrutinize the last decade of NIKE's dividend payments.
During the past 10-year period, the first annual payment was US$0.3 in 2011, compared to US$1.1 last year.Dividends per share have grown at approximately 14% per year over this time.NIKE's dividend payments have fluctuated, so it hasn't grown 14% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.
So, its dividends have grown rapidly over this time and the stock may be worth considering as part of a diversified dividend portfolio.
3. Dividend Growth Potential
Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see NIKE has grown its earnings per share at 10% per annum over the past five years.A company paying out less than a quarter of its earnings as dividends, and growing earnings at more than 10% per annum, looks to be right on the cusp of its growth phase.
Assessing the situation above, NIKE scores well in our analysis. There is plenty of room to grow, and the dividend is fairly safe with the low payout ratio. Furthermore, the earnings are growing at a steady pace.
It might not be perfect, but the stock might be suitable for many portfolios at the right price.
It's important to note that companies with a consistent dividend policy will generate greater investor confidence than those with an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analyzing a company. For instance, we've picked out 1 warning sign for NIKE that investors should take into consideration.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.