We can’t forget that sports apparel is a cyclical industry as well, as seen by the -15% sales growth decline during the great recession. Slowing growth around the world, but especially in China, could hurt sales and make management’s goal of achieving $50 billion in revenue by 2020 (nearly 60% growth compared to 2015 sales of $30.6 billion) a tougher target to hit.
Nike’s large international presence also means that the company’s reported sales, earnings, and free cash flow can be hurt when the U.S. dollar strengthens (Nike converts local currencies into dollars for reporting purposes). While this risk doesn’t impair Nike’s long-term earnings power, it can still weigh on the stock over shorter time periods.
Thus far the stronger US dollar is costing the company 2%, or 20% of its reported growth, although the effect varies from region to region. For example, in strong currency regions such as Europe, the negative currency effect eats up 30% of reported growth. But in emerging markets it can be as much as 120%, which is what happened in the most recent quarter when emerging market sales rose 11% but ended up -2% thanks to the strong dollar.
Dividend Safety Analysis: Nike
We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend.
Our Dividend Safety Score answers the question, “Is the current dividend payment safe?” We look at some of the most important financial factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more.
Dividend Safety Scores range from 0 to 100, and conservative dividend investors should stick with firms that score at least 60. Since tracking the data, companies cutting their dividends had an average Dividend Safety Score below 20 at the time of their dividend reduction announcements.
We wrote a detailed analysis reviewing how Dividend Safety Scores are calculated, what their track record has been, and how to use them for your portfolio here.
Nike Inc (NYSE:NKE) has a Dividend Safety Score of 99, indicating that it is among the safest dividends of any stock in the market today. Nike’s strong safety rating begins with its healthy payout ratios.
First, Nike’s free cash flow (FCF) payout ratio over the last 12 months is a moderate 50%, meaning that FCF could theoretically get cut in half and the current payout would still be safe. And keep in mind that such a FCF collapse would take dire economic conditions indeed.
The company’s FCF payout ratio has yet to rise above 50% in the past decade, even during the worst economic catastrophe since the Great Recession.
Source: Simply Safe Dividends
Source: Simply Safe Dividends
Speaking of the Great Recession, Nike’s business powered through. Sales dipped just 1% in fiscal year 2010, and Nike’s stock outperformed the S&P 500 by 19% in 2008. Resilient businesses often have safer dividends as well.
Source: Simply Safe Dividends
Nike has consistently generated great free cash flow as well. Free cash flow is the money Nike has left after reinvesting back into its business and is the sign of a healthy business. It also allows for sustainable dividend payments.
Source: Simply Safe Dividends
