Nike, Inc. (NYSE: NKE) is the world's largest company in the textile - apparel, footwear and accessories industry. As of Oct. 26, 2015, Nike had a market capitalization of $111.96 billion.
Nike first began as Blue Ribbon Sports in 1964 and became incorporated as Nike in 1971. Since its humble beginnings, when the company had $1,200, it has become one of the world's largest and most well-known sportswear brands.
To increase its global expansion, it operates in North America, Western Europe, Central and Eastern Europe, emerging market countries, Japan, and China. With its increasing earnings and its blue-chip status, it is poised to become an S&P 500 dividend aristocrat. A company that is an S&P 500 dividend aristocrat must have increased its dividend for 25 consecutive years and must be included in the S&P 500 Index.
Dividend Policy and Fundamentals
As of Oct. 26, 2015, Nike is expected to pay out an annual dividend of $1.12 per share for 2015. It has a dividend yield of 0.85%, while the average dividend yield of the consumer goods sector is 2.44%. Under Armour, one of Nike's main competitors, does not offer its investors any dividends, so it does not have a dividend yield. Adidas paid out an annual dividend of 85 cents per share and had a dividend yield of 1.88%. Therefore, Adidas pays out more in dividends each year relative to its share price than Nike.
Nike has been paying out quarterly cash dividends to its shareholders since 1985. Moreover, it has increased its dividend for 13 consecutive years, which puts it on pace to become an S&P 500 dividend aristocrat. From its 1985 to 2015, after adjusting for its stock splits, Nike paid out quarterly dividends ranging from 0.5 cents per share in 1985 to 28 cents per share in 2015. Over the past three years, Nike's dividend has increased by an average of 15.8% per year.
Nike paid out an annual dividend of $1.08 per share over the fiscal period ending on May 31, 2015. Additionally, it paid an annual dividend of 93 cents per share over the fiscal period ending on May 31, 2014. This was a 16.13% increase year over year. Nike increased its dividend by 33 cents between the 2013 and 2014 fiscal years, which was a 55% increase compared to its annual dividend per share during the 2013 fiscal year.
Nike has consistently generated increasing revenues and earnings over the past 10 years. Based on trailing 10-year data, it has an average annual revenue growth rate of 9.9%; an average annual earnings before interest, taxes, depreciation and amortization (EBITDA) growth rate of 10.1%, earnings per share (EPS) without nonrecurring items (NRI) growth rate of 11.5%, a free cash flow growth rate of 9.7% and a book value growth rate of 10.2%.
As of Aug. 31, 2015, based on trailing 12-month data, Nike has a revenue growth rate of 9.8%, an EPS without NRI growth rate of 23.1% and a free cash flow growth rate of 60.7%. Between 2010 and 2015, Nike has increased its revenues consistently year over year. Nike reported total revenue of $19.01 billion for the 2010 fiscal year and recently reported total revenue of $30.6 billion for the 2015 fiscal year. Nike's increasing earnings, free cash flow and dividend indicate that it has a robust business model and is confident in its growth.
Dividend Ratios and Safety
Over the past 10 years, Nike has not paid out more than half its earnings. Consequently, it maintained a high dividend coverage ratio, which indicates its dividend was sustainable over this period. The dividend payout ratio indicates the portion of EPS that is paid out to investors in the form of cash dividends. The dividend coverage ratio indicates the number of times a company can pay dividends to shareholders with its EPS.
Nike reported a full-year EPS of $3.70 for the 2015 fiscal year. Therefore, it had a dividend coverage ratio of 3.43 and a dividend payout ratio of 29.19%. It had a full-year EPS of $2.97, a dividend coverage ratio of 3.19 and a dividend payout ratio of 31.31% for the fiscal year ending on May 31, 2014. Nike reported a full-year EPS of $2.70 and paid out an annual dividend of 60 cents per share during the 2013 fiscal year. Consequently, it had a dividend coverage ratio of 4.5 and a dividend payout ratio of 22.22% for the end of this period. Since Nike maintains a high dividend coverage ratio and has not paid out more than it is earning, it is unlikely for it to ruin its track record and cut its dividend.
Nike's increasing positive free cash flow solidifies its future for dividend payments. Over the past five fiscal years, Nike has not paid out more than half of its free cash flow in dividends. Nike had a free cash flow of $3.72 billion for the fiscal year ending on May 31, 2015, which is an increase of 75.47% compared to the fiscal year ending in May 2014. As Nike generated increasing earnings and stable free cash flows between 2011 and 2015, it has consistently raised its dividends and maintained a dividend payout ratio of between 20 to 30%.
Nike's Expected Earnings, Revenue and Dividend Future
Based on 19 analyst estimates, Nike is expected to report a full-year EPS of $4.28 with the lowest and highest ranging between $4.15 and $4.42 for the fiscal year ending in May 2016. Based on 29 analyst estimates, it is expected to report full-year revenue of $32.76 billion. Additionally, it is expected to report full-year revenue of $35.95 billion for the fiscal year ending in May 2017. Based on 31 analyst estimates, Nike is expected to report a full-year EPS of $4.92 for the 2017 fiscal year.
Therefore, based on its forward annual dividend of $1.12 and its expected EPS for the 2016 fiscal year, Nike should have a dividend payout ratio of 26.17% and a dividend coverage ratio of 3.82. This indicates that Nike is unlikely to cut its dividend within the foreseeable future. Nike's strong cash flows and global growth enable it to continue paying and increasing its annual dividend for its shareholders.
Nike's presence in China is likely to add to the company's increasing revenues. China is one of the largest markets for sportswear in the world, which provides Nike with a high growth opportunity in this emerging market. Nike's strong earnings over the years have placed it in a leading position in the athletic footwear and apparel markets. As Nike expands its presence in emerging markets, its earnings are likely to grow.