Nike’s Dividend Growth, 35% Slide Make It A Bargain

One tested strategy to build an income-generating portfolio for your golden years is to invest in quality dividend-growth stocks. 

Companies that increase their cash payouts quarter after quarter demonstrate that they can produce steady and reliable income for their investors, not just during the good times, but also during downturns and recessions.

Dividend-growth stocks also offer a good avenue to beat inflation. With markets in tumult and inflation surging, dividend-paying stocks have become popular again in 2022 as investors shun high-growth technology players and seek refuge in the inflation-beating sectors of the market.

Unlike bonds that pay fixed principal and interest payments, these companies provide a regular pay raise in the shape of dividends to boost your spending power. You can use that cash to reinvest and buy more shares or to meet your monthly expenses.

One company that is offering excellent value to long-term investors these days is the global sportswear giant Nike (NYSE:NKE). Its stock, trading at $104.92, has shed more than 35% of its value this year amid slowing sales in China, inflation and supply-chain issues.

Source: Investing.com

While these issues may continue to hurt the company’s full-growth potential in the short term, investors have many reasons to feel optimistic about the company’s income appeal. The maker of Air Jordan and Air Force 1 sneakers has an impressive track record when it comes to rewarding investors.

A Smart Dividend Play

Its average dividend growth over the past five years has been more than 11%. With a low payout ratio of just under 30%, the company has much more capacity to hike its dividend. The stock currently pays a dividend of $0.3 per share on a quarterly basis, which, at the current share price, translates to an annual dividend yield of 1.13%.

That may sound meager to many dividend-conscious investors, but yield percentage doesn't convey the full story regarding why this is a smart dividend play for buy-and-hold portfolios. When a company regularly hikes its dividend, the yield on the original cost basis also grows. And if you hold on to your investment, that 1% yield will grow to 3% or 5% over time.

But analyzing stocks just based on their yields isn’t a good approach, however. The best dividend stocks are the ones with payouts that are raised regularly without negative surprises. Nike has hiked its payout for 18 consecutive years. 

Nike also uses its robust cash flows to support share buybacks and a rapidly increasing dividend. Last month, Nike’s board authorized a new four-year, $18-billion stock buyback program. It will replace the company’s $15-billion share buyback program, which will end in the coming fiscal year.

Nike is among those powerful global brands that gain further market share during times of disruption. Aneesha Sherman, equity analyst at Bernstein, wrote in a recent report that strong brands like Nike emerged with greater market share coming out of previous crises, including the 2000 dot-com crisis, the 2008-09 recession and the 2020 COVID-19 pandemic. 

Along with dividend stability, Nike constantly innovates, in order to fuel additional growth across its business lines. For example, Nike’s direct-to-consumer sales, which have been the focus since the pandemic hit in 2020, are growing at a robust pace, helping to cut costs and improve margins. Revenue in its direct business grew 17% in the most recent quarter, making up for about 42% of total sales.

Bottom Line

Nike’s more than 30% slide in this market downturn is a good buying opportunity if you are putting together a retirement portfolio. The company may not show its full earnings potential as long as supply-chain issues are not resolved and demand doesn’t return to normal in China. But the weakness is temporary and its long-term growth potential is intact.

Disclosure: The writer owns shares of Nike.