Finance
A purchasing opportunity that comes along once every ten years? This wonderful dividend stock is currently dirt cheap.
Nike (NYSE:NKE) has seen better days. Shares of the leading athletic footwear and apparel manufacturer are currently nearly 60% below their peak from a few years ago. It is down 40% from its 52-week high. That led to Nike trading at its lowest valuation in more than a decade.
The shoe stock the falling price has done that too drove up are dividend yield to more than 2%. That is the highest level since the financial crisis and well above S&P500‘S average (about 1.3%). This is an attractive level given the company’s exceptional track record of increasing its dividend. Here’s a look at whether this might be one of the best times to buy Nike in years.
Working to fix the problems it has caused
Nike is facing problems of its own making. It focused so aggressively on growing its online sales that it cut ties with several retailers. That strategy left the company wide open to competition the physical retail worldwhere customers could try on competing products. As a result, wholesale sales plummeted, while direct sales also slowed.
The company has since worked to rebuild its wholesale relationships to reverse declining sales in those markets. However, direct sales continue to weaken. This is evident from the latest earnings report. In the fiscal fourth quarter (ended May 31), sales fell 2% to $12.6 billion as a 5% improvement in wholesale sales failed to offset an 8% decline in NIKE Direct sales.
“We are tackling our near-term challenges head-on,” CEO John Donahoe said in the quarterly results. He noted that the company is make progress by continuing to innovate, ‘moving at the pace of the consumer’ and focusing on the entire market.
However, the company expects challenges to continue in the near term. After a modest 1% increase in sales last fiscal year, Nike expects sales to decline by mid-single digits in the current fiscal year. That came as a surprise to analysts, who on average expected a modest increase. The company plans to invest heavily in product innovation, sales and marketing go on again a growth trajectory.
The premium dividend stock is active sale
Despite declining sales, Nike remains highly profitable. The company’s actions to improve margins paid off last year. Net income rose 12% to $5.7 billion, or $3.73 per share.
Now that the stock price is falling, Nike now trades at a bargain price of about 19 times earnings. That is the lowest level since 2012 and well above the peak of 85 that came from the worst years of the pandemic in 2021. Nike is also cheaper than the broader market (the S&P 500 index). P/E ratio is around 26).
That’s an attractive level for a company with an excellent track record of dividend growth. The company has increased its payouts for 22 years in a row, including by 9% last November.
Despite the slow sales, Nike should have no problem keeps increasing his payout. The company’s cash flow from operations grew 27% last year to $7.4 billion. That easily covered dividend expenses of $2.2 billion. It also provided the company with money to buy back its cheap shares. Nike repurchased $4.3 billion of stock last year as part of a four-year, $18 billion authorization. Despite all these cash returns, Nike ended the fiscal year with $11.6 billion in cash and short-term investments, up $0.9 billion from the same period last year.
The company’s strong cash flow and the cash balance will give it the flexibility continue to return money to shareholders. The company has approximately $9.1 billion remaining on its current repurchase authorization, that is enough to retire 8.5% of the population outstanding shares at the current price.
An attractive purchasing opportunity
Nike is trading at its lowest valuation and highest dividend yield in more than a decade. While the company has been confronted challenges, it has the brand power and financial power to turn things around. That’s why now seems like one of the best times in a long time to buy this premium dividend growth stock.
Should You Invest $1,000 in Nike Right Now?
Consider the following before buying shares in Nike:
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Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in Nike. The Motley Fool recommends the following options: Long calls of $47.50 in January 2025 on Nike. The Motley Fool has one disclosure policy.
A purchasing opportunity that comes along once every ten years? This wonderful dividend share is currently dirt cheap. was originally published by The Motley Fool
