The other key protective factor is the company’s strong balance sheet. As you can see, though the sports apparel industry isn’t a highly capital intensive one, Nike nonetheless has a very low level of debt.
In fact, the company has a net cash (cash + cash equivalents – total debt) position of more than $2.5 billion and is generating annual free cash flows of over $2 billion a year. Nike also maintains an AA- credit rating with S&P.
Simply put, Nike is a blue chip with a fortress balance sheet that can withstand pretty much any economic calamity barring an outright apocalypse.
Source: Simply Safe Dividends
Overall, Nike’s dividend is about as safe as they come. The company’s healthy payout ratio, durable business model, excellent free cash flow generation, and pristine balance sheet position it well to continue making dividend payments for many years to come.
Dividend Growth Analysis
Our Dividend Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
Nike’s Dividend Growth Score is 93, indicating that investors can likely expect many more years of strong payout growth. The company’s strong dividend growth prospects are driven by its healthy payout ratios, excellent balance sheet, and solid earnings growth potential.
Nike has paid uninterrupted dividends for more than 25 years and increased its dividend every year since 2002. The company is a Dividend Achiever, having raised its payout for at least 10 straight years.
As seen below, Nike’s dividend growth has been exceptional and consistent. The company’s dividend grew 15.4% per year over the last 20 years and by 15.6% per year over the last three years. Nike last raised its dividend in late 2015 by 14.3%.
Source: Simply Safe Dividends
Looking ahead, Nike has potential to continue rewarding shareholders with 10%+ annual dividend increases thanks to strong earnings growth and flexibility with its healthy payout ratio and balance sheet.
Valuation
Even despite its 24% share price collapse over the last year, Nike’s stock still trades at a forward P/E ratio of 21.3 and offers a small dividend yield of 1.3%, which is about in line with the stock’s five-year average yield.
Nike doesn’t look like a bargain today, but high quality dividend growth stocks rarely do. If the company can deliver double-digit earnings growth over the next decade, which would be in line with the company’s historical results and hopes for the future, shares of Nike would likely deliver annual total returns of at least 10%.
Alternatively, if smaller companies and evolving consumer preferences begin making future growth more difficult to come by for Nike (which is largely why the stock has declined over the last year, in my view), future earnings growth could disappoint. In this scenario, Nike’s P/E ratio would likely slip below 20 and result in more of a mid-single digit annual return profile for long-term investors.
