Finance
1 Beautiful S&P 500 Dividend Stock Down 52% to Buy and Hold Forever
Shoe and sportswear giant Nike (NYSE:NKE) is one of the best performing stocks of all time, but you wouldn’t know if you’ve owned shares in recent years. The stock has lost about half its value since peaking in late 2021. Slow sales momentum and competitive pressure have led many to declare Nike a dinosaur beyond its prime.
Nike deserves some criticism. Management has admitted that the company has made a number of mistakes and that solutions are in the works.
But instead of taking management at its word, investors can look to the company’s fundamentals for all the evidence they need to support buying and holding Nike at these low prices.
Here are three reasons to buy the Swoosh and never let go.
1. Nike’s demise is exaggerated
For decades, people have willingly paid a premium for Nike products. Some may argue that Nike’s soft sales momentum indicates declining brand and pricing power, but it seems more likely that this is a consumer problem and not something specific to Nike.
Weak results from Starbucks And McDonald’s signal that people are eating out less. Food companies love PepsiCo And Hershey warn that consumers are passing on these impulsive treats in supermarkets. Is it really an exaggeration to think that some consumers will simply wait to buy that new pair of sneakers?
Of course, some smaller niche competitors like On and Hoka have gained popularity. Niche competitors are not new; About ten years ago, many argued a rising star Under armor was destined to dethrone Nike. That never came to fruition.
Why? Sports culture is about connecting with the iconic athletes that consumers look up to, and no one beats Nike at this game, from legacy stars like Michael Jordan and LeBron James to new stars in key demographics like Caitlin Clark in women’s basketball. They all represent the Swoosh.
2. The ability to turn
As mentioned, Nike deserves some blame for its recent stumbles. First and foremost, the company made a strategic mistake by leaning too heavily on its direct-to-consumer business model. Nike underestimated the importance of relationships with wholesalers.
Selling directly to consumers can be more profitable and give Nike more control. However, wholesalers ensure that the product reaches more people faster, which relieves Nike of a lot of logistics and other work. Management felt it had neglected wholesaler relations enough that it made a point last quarter to emphasize increasing investments in restoring wholesaler momentum, including rehiring the retired executive director Tom Peddie to oversee these efforts.
Will this shift boost sales momentum? That’s hard to say, especially given the current consumer weakness. Yet Nike has long dominated because it is wise and bold enough to recognize when something isn’t working and make the necessary changes.
3. Strong financials support earnings growth
Earnings growth is perhaps the most critical factor for a stock’s long-term return. Nike has achieved a return of more than 76,000% during its time as a publicly traded stock. How? A great company like Nike can push multiple buttons to grow earnings per share rather than relying solely on revenue growth.
Yes, Nike has become an industry titan, with annual revenues exceeding $51 billion. But thanks to Nike’s strong profit margins, about $0.13 ends up as free cash flow, cash profits that management has spent on share buybacks to reduce its share count. Owning fewer shares increases Nike’s earnings per share, which supports a higher stock price over time.
Nike has bought back about 13% of its shares in the past decade alone. The company also pays dividends to its shareholders, using leftover cash flow. Today, Nike pays $0.37 per quarter, which equates to an annual fee of $1.48 for each Nike share you own. That yields 1.76% at the current share price, adding to any potential share price appreciation.
These dividends and share buybacks will likely continue. Nike’s balance sheet contains $11.5 billion in cash and a strong AA credit rating. The dividend payout ratio is only 33%. Even with stagnant sales, the company has enormous financial flexibility.
Of course, you probably won’t buy Nike if you think the brand has reached its peak. But history shows that Nike has recovered before, and if there’s one company with the resources to revive growth, it’s the Swoosh.
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Justin Pope has positions in Hershey. The Motley Fool has and recommends positions in Hershey, Nike, and Starbucks. The Motley Fool recommends Under Armour. The Motley Fool has one disclosure policy.
1 Beautiful S&P 500 Dividend Stock Down 52% to Buy and Hold Forever was originally published by The Motley Fool
