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Nike Inc (NKE): A Quality Dividend Growth Stock Down Over 20%

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Since its founding in sleepy Beaverton, Oregon, in 1964, Nike Inc (NYSE:NKE) has grown into the world’s most dominant sports apparel supplier, and 18th most valuable brand in the world.

Along the way they have made countless long-term dividend investors very rich. In fact, from 2006 through 2015, Nike has returned 20.9% per year (including dividends) compared to the S&P 500’s 7.4% annual return.

However, over the past year, concerns over slowing sales, increasing competition from the likes of ADIDAS AG NPV (REGD) (OTCMKTS:ADDDF) and Under Armour Inc (NYSE:UA), and falling margins have sent shares nose diving over 20%.

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Learn if the king of sports apparel could be unseated from its throne and if this recent sell off makes now a reasonable time to buy what could prove to be one of the best blue chip dividend growth stocks of the next decade.

Business Description

Nike designs, develops, markets, and sells footwear, sports apparel, equipment, and accessories around the world in nine major market segments: basketball, Air Jordan, football, men’s and women’s training, action sports, sportswear, and golf. Some of its key brands are Nike, Jordan, Hurley, and Converse.

It has four main reporting units: Footwear, Apparel, Equipment, and the Global Brands division. However, as you can see, Footwear, and Apparel are by far the largest, fastest growing, and most important divisions.

Division Fiscal Q1 Revenue % of Revenue YoY Change YoY Constant Currency
Footwear $5.472 billion 64.7% 7% 10%
Apparel $2.549 billion 30.1% 9% 12%
Equipment $423 million 5.0% 4% 6%
Global Brands $15 million 0.2% -42% -30%
Total $8.459 billion 100% 8% 10%

Source: Nike Earnings Release

By geography, approximately 47% of Nike’s sales are within the U.S. Around two thirds over Nike’s total revenue is generated by North America and China. The business is very global.

Business Analysis

Barring times of extreme global economic weakness Nike has been able to generally put up annual high-single to low-double digit sales growth, even more impressive EPS growth, and steadily rising returns on investor capital.

Since 2005, Nike’s revenue has more than doubled and EPS has more than tripled.

These are all signs of the company’s strong innovation brand equity, which gives Nike good pricing power and a strong moat. Speaking of innovation, over the past 25 years, Nike has built the third largest design patent portfolio in the country.

Once the company invents a product, it can scale it across sport categories and geographies. As the world’s largest footwear and athletic apparel brand, Nike also enjoys economies of scale in its production processes.

The final result of these strengths can be seen in Nike’s industry leading margins and very impressive return on capital.

Company Operating Margin Net Margin Free Cash Flow Margin Return On Equity Return On Equity Return On Invested Capital
Nike 13.1% 11.6% 6.8% 18.3% 30.6% 27.0%
Industry Average 11.6% 8.9% NA 13.7% 23.6% NA

Source: Morningstar, Simply Safe Dividends

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