Investors often turn to dividend stocks during times of high inflation and slowing economic growth due to their reliability and stability. Such stocks also tend to outperform non-dividend paying stocks.
Asset managers at Hartford Funds found that between 1930 and 1921 there was never a decade when dividend stocks in the S&P 500 did not generate positive returns. Even during the so-called “lost decade” of the 2000s, when the index declined, income-generating stocks posted gains of 1.8%.
So it’s understandable why people look to Dividend Aristocrats for investment ideas. These are dividend-paying stocks in the S&P 500 that have increased their payouts every year for 25 or more consecutive years. However, of the thousands of shares available, only a few dozen companies qualify as copyrights. This shows that it is a threshold that is not easily reached.
There is one company, however, soon to join those ranks, and investors may want to take a closer look as a possible addition to their portfolio.
An impressive record of successes
Nike (NKE 0.64%) recently announced that its board of directors approved a quarterly dividend of $0.34 per share, which represents an 11% increase over the amount previously paid.
The dividend hike represents Nike’s 21st consecutive year of increasing payouts, so it’s well on its way to joining that illustrious group of Dividend Aristocrats in just a few years. But it also shows a more impressive feat than just tacking on another year of dividend hikes. Every year for the past 12 years Nike has increased its winnings by double-digit rates: an impressive 12.1%, on average.
While the dividend only returns a modest 1.1% annually, its payout ratio (or the percentage of its profits that pays out as a dividend) is a healthy 34%, meaning the dividend is safe and there’s plenty of room for future increases to come. So there should be no disruption to his journey to reach the 25-year mark.
But let’s take a look at its business, because that’s what ultimately determines whether it continues to pay a dividend, let alone increase it.
Slow down global growth
There is no doubt that Nike has hit a rough patch. The stock is down 40% from its recent highs (and even more until recently) as sales growth has slowed and profit margins have shrunk. Much of the concern has to do with the undue extent of influence the Chinese economy has on its performance.
Nike generates 13% of its revenue from China, down from 16% last year as the country’s zero-tolerance COVID policies have created massive disruption for businesses. Individuals are still locked up in their homes at times, unable to go out to purchase even the most basic necessities. As China’s growth slowed sharply, Nike’s fiscal first-quarter sales plunged 16% year over year.
Slowing economies in other parts of the world, including here in the US, are also concerning, as inventories are rising at their fastest rate ever. It forced the sneaker maker to try to liquidate some of its merchandise by discounting prices and selling items through its outlet stores.
The shortfall is causing Nike to be extremely cost-conscious, with an early casualty being its $15 billion share repurchase program, which still had about $5.6 billion remaining.
Expansion for the future
Nike isn’t in decline, though. Total sales still grew 10% year over year in the quarter, as “brand digital” sales (those in its stores and on its website) increased 23%. Gross margins were down 220 basis points but still sit at a strong 44%, although that contributed to a 20% decline in earnings per share.
Nike continues to invest in the metaverse, for better or worse, which currently seems to be a positive development for it. And he always has his archive of sneaker designs he can rely on, like his Michael Jordan lineup, which seems to be minting money every time a new edition comes out.
It also announced it was expanding its physical retail presence by opening its first Nike Rise store in the United States.
Don’t just do it, though
While that makes for a strong company in the long run, its stock isn’t really cheap despite its recent decline. The stock trades for 28 times next year’s earnings, 3.5 times its sales, and 96 times the free cash flow it produces.
This argues that investors shouldn’t take big bites of the stock, but rather take a slow-moving approach and buy stocks if weakness over time. The strategy will allow you to build a position at better prices, but still benefit if the stock goes up. And all the while you get paid to own the stock as it marches to its inevitable position of Dividend Aristocrat.