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Just Do It: This 'Dividend Achiever' Offers 10 Percent Annual Growth

Just Do It: This 'Dividend Achiever' Offers 10 Percent Annual Growth
(Bhutri/Dreamstime)

By    |   Thursday, 06 September 2018 12:48 PM

There are no guarantees in the stock market, and this is particularly true for dividend stocks. A dividend payment is a portion of a company’s earnings that are distributed to investors after all other bills are paid. Companies make the choice to pay—or not pay—a dividend to shareholders.

While investors can never be fully assured that a company will continue to pay a dividend, focusing on stocks with long track records of dividend increases can help. For example, the "Dividend Achievers" are a group of stocks that have increased their dividends for 10+ years in a row.

Nike Inc. (NKE) is a Dividend Achiever that has raised its dividend for 16 years in a row. Due to its strong growth potential, Nike should continue to increase its dividend by at least 10% per year going forward, which makes it an attractive holding for dividend growth investors.

Business Overview & Current Events

Nike is an athletic footwear and apparel giant. It has annual revenue of more than $36 billion. In addition to the core NIKE brand, the company also has subsidiary brands including Converse and Hurley. On June 28th, Nike reported strong results for the fourth fiscal quarter and full fiscal year. After adjusting for currency fluctuations, revenue increased 8% for the fourth quarter, and 4% for fiscal 2018. Earnings-per-share increased 15% for the most recent quarter.

Nike has struggled in the U.S. over the past year, due primarily to the decline in mall traffic. This has negatively impacted demand for many of the retail outlets that sell Nike products, such as Foot Locker (FL). As a result, Nike’s sales in North America declined 2% in fiscal 2018. Fortunately, Nike has more than offset the domestic decline with growth in international regions. In 2018, sales increased 18% in China, 10% in Asia-Pacific and Latin America, and 9% in Europe, the Middle East, and Africa.

Nike’s status as a global powerhouse fuels its future growth potential. The emerging markets, particularly China, are highly attractive for premier consumer brands such as Nike. According to Forbes, Nike is the 18th most valuable brand in the world. Nike dominates the athletic shoe industry, with a great deal of brand power. Expansion in high-growth emerging markets will easily allow Nike to grow its earnings and dividends for many years.

Dividend Growth Prospects

Nike has a current dividend yield of 1.0%, which isn’t too exciting. However, investors will see their dividend income rise rapidly over time, thanks to Nike’s high rate of dividend growth. Nike delivered an 11% dividend increase for 2018. In the past five years, the company raised its dividend by 13.8% each year, on average.

Nike has a good chance of sustaining a 10%+ annual dividend growth rate moving forward, because the company continues to grow revenue and cash flow at a high rate. It also benefits from having a low dividend payout today, which leaves room for higher increases. In fiscal 2018, Nike generated free cash flow of $3.93 billion. Nike needed $1.2 billion for dividends in the same period, resulting in a dividend payout ratio of 31% in terms of free cash flow. Since Nike can still be expected to continue growing earnings and cash flow, annual dividend increases of 10%+ are easily justified.

Such a high dividend growth rate will really add up over time for investors. For example, if Nike maintains its historical five-year dividend growth rate of 13%-14% increases each year, investors will see their dividend yield double every 5.5 years. In 11 years, Nike investors would generate a yield on cost of over 4%. This makes Nike a highly attractive stock for dividend growth investors.

Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.

 

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BenReynolds
There are no guarantees in the stock market, and this is particularly true for dividend stocks. A dividend payment is a portion of a company’s earnings that are distributed to investors after all other bills are paid. Companies make the choice to pay—or not pay—a dividend to shareholders.
nike, dividend, annual, growth
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2018-48-06
Thursday, 06 September 2018 12:48 PM
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