There are a few companies in the world that are absolutely dominant in their respective industry.
But there are even fewer examples like that of Nike Inc. (NKE).
In terms of market cap, they’re more than five times larger than they’re closest competitor.
That’s just incredible.
Nike is the world’s largest designer, developer, and marketer of athletic footwear, apparel, accessories, and equipment.
[ad#Google Adsense 336×280-IA]They got to that dominant position by combining quality products the market demands with innovation and deft marketing.
And through that, they now enjoy one of the world’s most recognizable brands which allows them to charge a premium for their products.
In turn, this premium allows them to sport some of the best returns in the industry, which has also helped Nike build a track record of incredible top line and bottom line growth.
That growth has helped fuel Nike’s ability to return cash to shareholders in the form of an increasing dividend for more than a decade now.
Nike has long had an enviable position in the athletic footwear and apparel, built on the foundation of excellent marketing.
They’ve had major athletes like Michael Jordan, Tiger Woods, Cristiano Ronaldo, and LeBron James serve as spokespeople for the company, which has helped their brand equity immensely. Their annual marketing budget that exceeds $3 billion should allow them to continue to attract top-tier talent.
Meanwhile, innovation continues to yield results like Flyknit and FuelBand. This innovation should allow them to stay atop the competitive field, ensuring profit and dividend growth for years to come.
Speaking of growth, let’s see what the company has managed over the last decade.
Nike has grown its revenue from $13.740 billion in fiscal year 2005 to $27.799 billion in FY 2014. That’s a compound annual growth rate of 8.14%.
Earnings per share is up from $1.12 to $2.97 over that period, which is a CAGR of 11.44%. Anytime you see double-digit bottom-line growth over a decade or more, you should be impressed.
S&P Capital IQ predicts that NKE’s EPS will compound at a 14% annual rate over the next three years, citing continued growth in e-commerce and across its key markets.
That revenue and EPS growth is impressive by itself, but shareholders should be more than pleased by the fact that Nike is sharing the wealth by paying a growing dividend.
As such, you’ll find them on the prominent list of Dividend Champions, Contenders, and Challengers, maintained by David Fish. Mr. Fish compiles information on all 690 US-listed stocks that have increased their respective dividends for at least the last five consecutive years.
Nike has earned their spot on that list by increasing their dividend for the last 13 consecutive years, growing it by an annual rate of 16.3% over the last decade alone.
That rate of dividend growth is higher than what the company has managed in EPS growth; however, the payout ratio remains low at 32%.
The one potential drawback here as it relates to the dividend is the yield – at only 1.11%, there isn’t much current income there due to a fairly low yield. That’s also about 20 basis points lower than NKE’s five-year average.
Another aspect of the company’s high quality is the balance sheet.
NKE has negligible long-term debt, with a long-term debt/equity ratio of 0.11 and an interest coverage ratio well north of 100.
They have absolutely no issue with debt here.
Profitability is also outstanding. They’ve posted net margin that’s averaged 9.78% and return on equity of 21.83% over the last five years, which is fantastic relative to the competition.
Nike has some of the best fundamentals in the business, as one might expect considering their brand name that conveys an image of quality and dominance.
And that brand name – along with Nike’s quality products, innovation, and marketing – should allow the company to continue dominating their industry for years to come, which should be followed by continued profit and dividend growth on the back of premium pricing.
Their economies of scale – they sell products in more than 170 countries – far exceed any close competitor, which gives Nike incredible competitive advantages. And while that scale is easily evident in the 50,000 retail accounts the company has, they continue to build on that scale through additional channels like direct-to-consumer e-commerce, which allows for higher margins.
There isn’t really much to dislike here. However, there are risks like heavy competition, currency effects, and the potential for changing consumer tastes to consider. In addition, Nike is so dominant, that it may not grow as fast in the future as it has in the past.
Looking at the stock’s valuation, the P/E ratio sits at 28.87 right now. That’s high not only in absolute terms, but also relative to NKE’s own five-year average P/E ratio of 22.4. So it would appear the stock is far from a deal right now.
I valued shares using a two-stage dividend discount model analysis with a 10% discount rate and an initial dividend growth rate of 12%. I then used a terminal growth rate of 8%. The initial rate is below what the company has produced in terms of dividend growth over the last decade, while the terminal rate takes into account the company’s brand image and strong fundamentals. The DDM analysis gives me a fair value of $84.80.
Bottom line: Nike Inc. (NKE) is an incredibly high-quality company. One of the most well-known brands in the world, they rely on innovation, marketing, multi-channel distribution, and product quality to keep their dominant position alive. The dividend growth is spectacular and not slowing, which bodes well for long-term shareholders. However, the stock appears to be overvalued right now. I’d wait for a pullback of at least 10% before becoming interested in this stock.
— Jason Fieber, Dividend Mantra
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