Dividend Signals Smooth Sailing Ahead for Nike (NYSE: NKE), But is it Enough?

Nike NYSE: NKE is raising its dividend by 12% to $0.275 a share quarterly or $1.10 per share annually. The announcement, which came on Friday, wasn’t too hard to see coming, as the company has an 18-year history of increases. The new dividend yield is .74%.
You may be thinking:

Why should I care about such a small dividend yield?

I’m more interested in what the dividend signals than in the payout itself. You see, Nike – like many footwear and apparel companies – has had a challenging year. Revenue in Nike’s Q4 2020, which ended on May 31, dipped 38% yoy. It could have been a lot worse, if not for e-commerce. Digital sales were up 75% yoy and comprised 30% of total revenue.

Nike turned it around quickly, however, with Q1 2021 (the period ending August 31) revenue down just 1% yoy to $10.6 billion. That blew away consensus estimates of $9.15 billion.

On the earnings call, CFO Matthew Friend updated the full-year outlook, saying, “We now expect revenue to be up high single-digits to low double-digits versus prior year.” He expects “growth in the second half to be up significantly versus prior year.”

The CFO’s words gave me some confidence in Nike at the time, but the dividend announcement solidified that confidence. It’s easier for a company to change course on guidance than a dividend yield, particularly for companies – like Nike – that have a long history of dividend increases.

Nike Isn’t Cheap

I’m not the only one that notices Nike. The Q1 beat combined with the strong outlook sent shares to all-time highs. In the two months since, shares have mostly gone sideways.

Not only are shares extended, but the valuation is up-there. 46.5x forward earnings to be exact.

So, the question is…

Can Nike Race Past Its Valuation?

To answer that question, we must consider where Nike can find growth in the coming years.

Digital can be one of those places.

Back in August, we cautioned that digital growth would likely decrease as in-store sales bounce back. Well, those fears may have been unfounded. In Q1 2021, digital sales were up 82% yoy to account for 30% of total sales.

Nike is keeping its customers engaged through the use of its apps. The Nike Running Club app, for example, saw “four consecutive months of more than 1 million downloads each month of [Nike’s] audio-guided runs.”

We’ve seen a similar story play out in other industries. Starbucks NASDAQ: SBUX, for example, is turning its online users into sales – and on a large scale.

Then, there’s product innovation.

Nike athletic gear is becoming increasingly fashionable for women and Nike has taken notice. On the Q1 earnings call, CEO John J. Donahoe II said, “In Q1, we launched Nike (M), NIKE's first dedicated maternity collection. We also introduced a new NIKE yoga collection.”

Nike is also cashing in on the sustainability trend with the Space Hippie footwear platform and the VaporMax 2020. Donahoe said, “Sustainability will continue to be a key aspect of our innovation agenda going forward.” With the younger generations becoming a larger part of the consumer base, this prioritization makes Nike more future-proof.

Finally, there’s the increasing acceptability of casual wear in the workplace.

No, everyone isn’t going to work at home every day forever. People will return to the office. And when they do, the shift towards casual wear in the workplace will continue. A shift that results in more people wearing Nikes.

Is It Enough?

I like what I’m seeing on the digital and product innovation fronts. The shift towards casual wear in the office bodes well for Nike. And so, I expect Nike to grow for many years to come.

That said, I’m not sure if Nike can grow revenue at a low-double-digit CAGR over the next 5 years, and that’s about what it would take to grow into its current valuation.

To be clear: Nike is an excellent company that won’t get left behind when fashion trends inevitably change. And growth will be far from sluggish moving forward.

So, I’d keep a close eye on Nike and look for a pullback. If shares drop 15-20% from here, they’d be very appealing.