Can Investors Win the Race with Dividend Achiever Nike?

Key Points

• Nike shares are up 10% following mixed results and they might gain another 30%. 
• Normalization and DTC strength underpin results in FQ1.
• Dividends and share repurchases make this stock a winner for long-term investors. 

Nike NYSE: NKE shares are sprinting higher after its FQ1 release. The takeaway from the report is that this leading shoe and apparel manufacturer’s business is normalizing in the wake of the COVID bubble, and the stage is set for continued, long-term growth. The question for investors today is if this stock is a good buy for long-term holders, and, by all accounts, it is. While there are still headwinds to overcome, the company’s brand recognition, lean into DTC, and digital sales have it set up to outperform the sector and drive returns for investors. 

Among Nike’s attractions is its relative status as a Dividend Achiever. Dividend Achievers are stocks with an established history of dividend growth and an outlook for continued distribution growth. Investors looking for the next Dividend Aristocrats might want to focus on this list: Nike is among the top-rated. 

This company has increased its dividend for 21 consecutive years and is running a high 11% CAGR over the past 5. Based on the payout ratio, the company can sustain dividend increases well past the Dividend Aristocrat threshold. Add in the earnings outlook, and Nike can sustain an above-average distribution increase pace for Dividend Aristocrats. 

Nike Sprints Higher On Mixed Results 

Nike reported mixed results, but this is about the worst that can be said. The company’s revenue fell short of the Marketbeat.com consensus by a mere 46 basis points, and the weakness was offset by bottom-line strength. The internal metrics are a little tepid relative to expectations but show strength and normalization within the industry. 

Nike Direct sales, the DTC channel, are up 6%, with a 2% increase in digital while wholesale is flat. All segments contributed positively to results regionally, although China was less strong than expected. On a brand basis, strength in the core Nike brand was offset by some weakness in Converse. The bottom line, Nike had a solid quarter, with higher-margin DTC channels leading the way. 

The margin news is another area with “mixed” results that ultimately benefit shareholders. The gross margin improved by 10 basis points but was offset by a slight increase in SG&A. SG&A expense increase is attributed to wages and advertising, which is helping to underpin sales. The takeaway is that GAAP earnings of $0.94 grew only 1% compared to the 2.0% topline increase but beat the consensus estimate by $0.18 or 2300 basis points. 

Nike Has a Solid Balance Sheet and Capital Return Program 

Nike’s dividend, share repurchases, and CAPEX resulted in a cash drawdown compared to last year, but this is not a red flag. The company still carries over $8.75 billion in cash on its balance sheet, the debt is well-managed, and the cash flow is sufficient to continue with current plans. Nike may choose to curb CAPEX and share repurchases at some time in the future, but no significant changes are expected now.

As it is, the 1.5% dividend was compounded by share repurchases in Q1, which gives an effect annualized yield near 4.5%. Those repurchases have the share count down 2.7% YOY, and robust repurchases are expected in the coming quarters and years. 

The Technical Outlook: The Bottom is in for Nike Stock

The price action in Nike didn’t look great going into the report due to concerns about weakness and margin strength. The post-release action is up 10%, confirming support at a critical level and indicating a bottom. The stock may move higher from here but must first move above the round-number resistance at $100. The next major hurdle will be at $110 and then $130.

A move above $130 would indicate a sustained rally; until then, Nike stock may be range-bound in the $90 to $130 range.