Dividend Investor Portfolio #26: Athletic Income
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Dear Investor,
Welcome to the 26th edition of TipRanks’ Dividend Investor Portfolio & Newsletter.
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Market-Moving News: September 16, 2024
Stocks ended the week on a high note after a five-day advance that helped erase most of the previous week’s losses. The S&P 500 (SPX) gained 4.02% and the Dow Jones Industrial Average (DJIA) rose by 2.60%. Meanwhile, the Nasdaq Composite (NDAQ) and Nasdaq-100 (NDX) surged by 5.95% and 5.93%, respectively.
After the previous week’s plunge, which was the worst for technology stocks since the start of the year, this week they led the market’s recovery amid widespread conviction that Fed cuts are coming. However, opinions about the size of the first cut are almost even, with chances of a 0.50% rate cut reaching 45% based on Fed Funds futures trading data.
The former New York Fed President Bill Dudley said that rising risks to the job market now strongly outweigh the inflation risk, adding to the central bank’s case for a jumbo cut. On the other hand, in the past two decades almost all 50 bps cuts have come amid or immediately before a recession. While the labor market is clearly weakening, many economists say that job gains like those seen in August are inconsistent with a recession.
Contrastingly, the Fed’s current interest rate is at its highest level since 2001, leaving ample room for policymakers to reduce it by a large percentage while still staying above accommodative monetary policy levels. Against this backdrop, Wall Street analysts believe the central bank should make a larger cut just to avoid falling behind the curve amid a shifting balance of risks.
An increasingly large cohort of economists and analysts now see high chances of the Goldilocks scenario, where the economy is still expanding, albeit at a slower rate, while the Fed takes the rates down to a neutral level over the course of the next few meetings. However, the central bank will certainly incorporate the incoming data in future economic assessments, which will affect the scope and pace of the impending rate decreases.
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This Week’s Quality Dividend Stock Idea
Nike, Inc. (NKE) is the world’s largest suppliers and manufacturers of athletic shoes, apparel and athletic equipment. The company designs, produces, and markets athletic and casual footwear, apparel, accessories, and equipment. It also sells a line of performance equipment and accessories, including bags, sport balls, socks, eyewear, digital devices, and more. Nike markets its product under the NIKE, Jordan (“Jumpman”), Converse, Chuck Taylor, All Star, One Star, Star Chevron, and Jack Purcell trademarks. It sells its products worldwide through company-owned stores, franchised stores, and third-party retailers; it also operates online platforms in more than 40 countries.
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From Truck Shop to Global #1
The company was founded in 1964 as “Blue Ribbon Sports” and changed its name to Nike, Inc. in 1971. Established as a distributor for a Japanese sport shoe brand and operating out of its founder’s truck, Nike slowly expanded its presence and sales volume until the invention of an innovative rubber sole in 1972 sparked explosive growth.
A series of clever ad campaigns, a catchy “Just Do It” slogan, and star athlete endorsers such as Michael Jordan, further propelled it to fame. The fast expansion was also supported by acquisitions, with the most important being the buyout of Converse in 2003. In the 2000s, Nike embarked on a restructuring path in order to refocus its operations around the core Nike and Jordan brands. Within this strategy, Nike divested of all the subsidiaries, retaining only Converse.
The Oregon-headquartered firm is one of the largest global sports brands, holding the title of the most valuable apparel brand in the world. Nike holds about 35% of the U.S. sports footwear market.
With a market cap of $118.5 billion and annual revenue of $51.4 billion, Nike is ranked #88 on the Fortune 500 list. The company performed an IPO in 1980; today, it is found on the component of the S&P 500 and DJIA indices.
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Stellar Financials are “Cool”
Nike generates its sales through three main business segments: footwear, apparel, and equipment. Footwear is by far its largest revenue source, responsible for over 65%. Apparel comes in at a distant second with ~27% of the revenues, with Equipment and Other comprising the rest. Nike has a large global presence, with North American sales representing 42% of the total, and the rest coming from EMEA, China, Latin America, and APAC.
Nike has an image of a “cool” growth company, whereas in fact it is a mature, very profitable, slow-growing business. In the past five years, its revenues have grown at a CAGR of 6%, while the adjusted EPS increased at a CAGR of 8.5%; these growth rates are similar to the average of the Footwear and Apparel industry. Contrastingly, Nike’s capital efficiency and profitability metrics leave most of its peers in the dust. Looking deeper, Nike comes in the top 5% in terms of ROE, ROA, and ROIC, and in top 20% in terms of operating, net income, and FCF margins.
Nike also boasts stellar financial health, holding negative net liabilities (it has more cash than debt) and earning more interest than it pays. Its robust finances are also reflected in its high credit ratings, “AA-“ at Standard and Poor’s and “A1” at Moody’s.
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Dividend Growth with Room for More
Nike has been paying dividends consistently each year since 1985, increasing them for 16 consecutive years. As such, NKE is a so-called “Dividend Contender” (a company that has paid dividends for over 10 years, but less than the 25 needed to become an Aristocrat).
Despite its long track record of dividend hikes, the payouts are still growing at a fast rate. In the past five years, NKE’s dividends have increased at a CAGR of 11.5%; the latest annual hike in December 2023 amounted to 9%.
Nike’s current dividend yield stands at 1.87%, almost twice the average for the Consumer Discretionary sector. The company’s low earnings-based and cash flow-based payout ratios, coupled with its high profitability and ample cash generation, allow for the outlook of further dividend growth for years to come. Analysts project that Nike’s payouts will grow at a rate of ~6-8% over the next three years, with the next dividend hike expected at the time of its December payout.
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Near-Term Headwinds…
Nike’s shares have lost 18% in the past year, with the large part of the decline coming after its fiscal Q4 and full-year 2024 earnings release on June 27th. For the fiscal year ended 2024, the company logged revenue growth of just 1% year-over-year, versus 16% growth in the prior fiscal year. However, adjusted diluted EPS rose 15.5% year-on-year, compared with FY 2023’s 14% decline. In FY 2024, the company experienced a decline in revenue in North America, which was offset by the growth in China, Asia Pacific, and Latin America.
The company’s diversified end markets help it maintain or grow revenues through different stages of the economic cycle, as was evident in its latest report. However, investors were spooked by the management’s revised forecast for fiscal year 2025, projecting negative mid-single-digit revenue growth instead of the previously anticipated positive growth. The company said it has observed a notable slowdown in lifestyle product sales in the U.S. and Europe, a trend that it expects to continue well into the first half of its fiscal 2025.
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…and Long-Term Strength
Despite the hit to investor sentiment due to macroeconomic headwinds weighing on sales, most Wall Street analysts remain fairly bullish on the company’s long-term prospects. Nike is one of the most iconic footwear brands in the world, worn and loved by millions, with a sticky and loyal customer base allowing ample pricing power.
To put things in perspective, Nike’s FY 2024’s revenues were larger than those of all its competitors combined (including Adidas, Puma, Under Armor, Sketchers, and Deckers Outdoor). In addition, the company has by far the largest advertising budget among sports brands, which allows Nike to work with the best athletes and reach multiple diverse audiences.
Coupled with NKE’s ability to maintain best-in-class return metrics and margins, many analysts and institutional investors view the company’s current revenue weakness as an opportunity to buy value at a reasonable price. Thus, Bill Ackman’s Pershing Square Capital Management disclosed a sizable new position in Nike back in August. Ackman’s track record of successful bets means that Pershing’s move didn’t go unnoticed, helping the stock regain some ground.
The company has also won over some Wall Street analysts of late, who confirmed their positive outlook. Thus, Evercore ISI added Nike to its “Top Five Softlines” list, while BMO Capital has included it in its “28 High-Quality Stocks” list.
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Total Return in Focus
Despite the recent upturn, Nike’s stock remains attractively valued compared to its historical valuations in the past decade, and carrying much lower premium to its sector than it did before this year’s decline. Moreover, NKE comes in near the bottom of the price range for its U.S. peers in the industry, underscoring its value proposition.
Besides being the only dividend-payer among its U.S. competitors (and paying the highest yield among global comparable peers), Nike compensates it shareholders through generous buybacks. In 2022, the company approved a four-year buyback program totaling $18 billion. In fiscal 2024, NKE executed share repurchases amounting to $4.3 billion, bringing the total repurchases within the program to $9.1 billion.
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Investing Takeaway
Nike, Inc. is a profitable, stable business with steady, consistent growth. It wields significant pricing power due to its large market share and sticky customer base, adding to its positive long-term prospects. The company’s best-in-class profitability metrics and profound cash generation ability support the outlook for continued dividend growth for years to come. These factors, coupled with its current historically low valuation and strong alignment with shareholder interests, make NKE a valuable addition to long-term income portfolios.
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Dividend Investor Portfolio
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Portfolio News
¤ Kroger (KR) reported its Q2 2024 earnings on September 12th. The company’s EPS exceeded analyst expectations, while revenue slightly missed. Identical store sales rose 1.2% year-over-year, while online sales surged by 11%, benefitting from strong increases in KR’s pickup and delivery business. Kroger also reported reduced shrink (i.e. the difference between inventory on the books and what is actually found in the stores), which boosted gross margins. The solid quarterly performance underscored the company’s resilience amid inflation and customers’ increased price sensitivity. Moreover, Kroger’s CFO said that the retailer’s momentum is driven by “positive customer trends that we expect to continue in the second half of the year.” The company’s stock surged as it raised the lower end of its full-year sales guidance and reaffirmed its annual adjusted EPS outlook.
¤ JPMorgan Chase & Co. (JPM) stock declined, leading other large banks lower, after its president said that analyst expectations for the bank’s net interest income (NII) in 2025 were overly optimistic. The conservative outlook echoed subdued guidance from other large lenders, as the Federal Reserve’s impending easing will lead to a decrease in banks’ interest income. On the other hand, JPM may see a significant rise in income investment banking fees, according to analysts. In other company news, the Federal Reserve scaled back its proposal for banks’ capital requirements increase. The new proposal calls for a 9% increase in capital levels, half the size of the central bank’s original plan from a year ago.
¤ Philip Morris (PM) announced a 3.8% raise to its regular quarterly dividend, with the increased payout of $1.35 per share payable on October 10, 2024.
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Recent Trades
None at the moment, although we are constantly evaluating stocks for a possible addition to the portfolio. Stay tuned.
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Portfolio Attributes
| Dividend Portfolio Yield |
Expected Dividend Growth | Expected Annual Income |
| 3.63% | +10.09% | $3,832.92 |
| Yield-on-Cost Adjusted, Weighted |
Average Analyst 12-Month Growth Outlook | 10K Per Stock at the Time of Purchase |
Current Portfolio
| Name | EX-Dividend Date | Payment Date | Yield on Cost | Annual DPS |
| Automatic Data Processing (ADP) | Sep 10, 2024 | Oct 03, 2024 | 2.16% | $5.60 |
| Allianz SE ADR (ALIZY) | May 08, 2025 | May 13, 2025 | 5.25% | $1.50 |
| Amgen (AMGN) | Nov 15, 2024 | Dec 06, 2024 | 2.62% | $9.00 |
| BlackRock (BLK) | Sep 09, 2024 | Sep 23, 2024 | 2.41% | $20.40 |
| Edison International (EIX) | Sep 27, 2024 | Oct 31, 2024 | 3.97% | $3.12 |
| EOG Resources (EOG) | Oct 17, 2024 | Oct 31, 2024 | 3.95% | $3.64 |
| JPMorgan Chase (JPM) | Oct 05, 2024 | Oct 31, 2024 | 2.04% | $4.60 |
| Kroger (KR) | Nov 15, 2024 | Dec 01, 2024 | 2.12% | $1.28 |
| LyondellBasell (LYB) | Nov 24, 2024 | Dec 04, 2024 | 5.27% | $5.36 |
| Philip Morris (PM) | Sep 26, 2024 | Oct 10, 2024 | 5.95% | $5.40 |
| Qualcomm (QCOM) | Sep 05, 2024 | Sep 26, 2024 | 1.85% | $3.40 |
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Click here for more stock market analysis from TipRanks Macro & Markets research analyst Yulia Vaiman
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Disclaimer
The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment, and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.
