Is Nike a better dividend pick?

Morgan Stanley released a list of top dividends earlier this week, citing Nike Inc. (NKE, finance) as one of its key recommendations.

The sportswear giant’s year-to-date trajectory has been less than ideal, but its economic performance remains robust, potentially leaving its stock in oversold territory.

Based on a holistic analysis, I think Nike is a high quality stock, but by no means a dividend play.

Earnings Review and Overview

Nike’s operating results remained strong throughout the year despite various global macroeconomic headwinds. The company released a strong second-quarter earnings report, beating earnings expectations by 9 cents per share.

In its most recent fiscal quarter, the company’s NIKE DIRECT jumped 11% year-over-year on a currency-neutral basis, assuming it stems from digitalization and targeting of improved consumers. Additionally, the company resumed its $15 billion share buyback program, repurchasing $1.1 billion worth of stock.

Nike is due to release its third quarter results on September 29, and many analysts are bullish on the company’s report.

According to RBC Capital Market’s Piral Dadhania, Nike is expected to see revenue growth from China despite numerous Covid-19 lockdowns. He also thinks the company’s profit margins could improve due to high operating leverage.

Finally, from a quantitative point of view, Nike’s income statement has been subject to a cautious recognition of profits. For example, the Beneish M-Score of -2.30 means the company has been accounting for earnings conservatively and any accounting-related earnings surprises are likely to be on the upside.

1573419250490654720.png

Valuation and dividend

Even though Nike’s earnings outlook looks bright, its stock isn’t priced attractively. Relative and absolute valuation parameters suggest that it is overvalued.

According to GuruFocus’ discounted cash flow analysis, Nike’s stock has a fair value of $51.59, which is well below its traded price of $96.83. Additionally, the company has a price/earnings ratio of 25.15, accommodated by a PEG ratio of 2.96, indicating that the market is overestimating its earnings per share potential.

1573419254382968832.png

Nike’s 1.28% dividend yield isn’t bad by any means, but it’s certainly far from the best in the market. The company presents balanced shareholder compensation, with share buybacks constituting a significant portion of its residual distribution. Additionally, Nike is reinvesting heavily to expand its footprint in emerging markets; therefore, the stock is unlikely to be a pure dividend play anytime soon.

1573419256916328448.png

Final Thoughts

Morgan Stanley’s classification of Nike as one of the top dividend picks is debatable. There is no doubt that this is a high quality company with operational finesse. However, key indicators suggest this is not a pure dividend game.

See also: (free trial)

» Take a free trial of the Premium Membership

Comments are closed.