Success in the stock market can be achieved with the following two traits: savvy stock selection and patience. The former is necessary because investors need to be quality-oriented with the businesses into which they invest their hard-earned capital. But without the conviction to let their investments in these businesses ride out any bumps in the road, investors may never be able to enjoy the fruits that remarkable investments produce over time.
Nike (NKE -1.14%) is a remarkable business. A $5,000 investment made in it 10 years ago, with dividends reinvested, would be worth nearly $20,000 today. For comparison, the same amount invested in the S&P 500 index would have grown to under $17,000. But is the stock still a buy for dividend growth investors?
Nike’s smart growth strategy is paying off
Recognizing that a direct-to-consumer (DTC) approach to sales would be more engaging and financially lucrative for its business, Nike shifted gears in 2017 to revive its growth prospects. And this change in its game plan has worked wonders for the company.
Nike’s total revenue surged by 102.4% from its fiscal 2013 to $51.2 billion during its fiscal 2023 (which ended May 31). This robust top-line growth was largely the result of a near-quintupling in the company’s DTC revenue over that timeframe to $21.3 billion in fiscal 2023. The company’s investments over the years to strengthen its supply chain to deliver on its DTC sales strategy are producing results: Total revenue rose by 10% in fiscal 2023 alone (and by 16% on a currency-neutral basis).
Nike’s diluted earnings per share only grew by 20.1% from fiscal 2013 to $3.23 in its fiscal 2023. But this is less an indictment of the company’s execution and more of a reflection of the macroeconomic environment. As demand for container shipping grew faster than supply during the COVID-19 pandemic, a significant shortage of container ships resulted in higher ocean freight rates. Nike’s shipping costs surged, which weighed on its profitability.
The good news is that Nike has renegotiated its contracts with its shipping partners for fiscal 2024, and brought its rates back down to near their pre-pandemic levels. This, in combination with tapering inflation and a growing mix of DTC sales, is why analysts believe Nike’s diluted earnings per share will soar by 55.1% from the fiscal 2023 result to top $5 in fiscal 2026.
The payout is safe and growing
Nike’s dividend, with its 1.2% yield at the current share price, might not immediately impress income investors. But this is fine in my opinion because Nike is more of a capital appreciation play. It’s also worth mentioning that its payout growth should be strong.
That’s because Nike’s dividend payout ratio was just under 40% in fiscal 2023. The company is retaining more than enough capital to further grow its business, buy back shares, and retire debt, while handing out annual dividend increases of around 10% for at least the next several years.
A sensible premium for a world-class company
Nike is a fundamentally solid business. Thus, it shouldn’t come as a surprise that the stock is valued at a premium versus its peers. Its forward price-to-earnings ratio is 28.9, while the footwear and accessories industry’s average ratio is 24.3.
Superior quality almost always comes at a higher-than-average price. But Nike stock has rarely appeared cheap at any point in the last decade, and that hasn’t stopped its shareholders from doing quite well. That is why I believe the stock remains a buy for investors seeking growth in both capital and income.
Kody Kester has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nike. The Motley Fool recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.