Nike's Hidden Gem: Why the Dividend Stock is a Must-Buy Now

In the ever-evolving world of investing, finding a stock that offers both stability and growth potential is like striking gold. nike, Inc. (NYSE: NKE) has long been a favorite among investors for its iconic brand and consistent performance. However, recent financial challenges have raised questions about its ability to sustain and grow its dividend payouts. Despite these concerns, Nike's strategic initiatives and long-term vision make it a compelling buy for income-seeking investors.

The Current State of Nike's Financials

Nike's fiscal 2025 third quarter results paint a mixed picture. Revenues were $11.3 billion, down 9 percent on a reported basis compared to the prior year, and down 7 percent on a currency-neutral basis. Diluted earnings per share was $0.54, a decrease of 30 percent from the prior year. These declines are concerning, but they also present an opportunity for investors to buy into a strong brand at a discounted price.



The 'Win Now' Strategy: A Game Changer

Nike's 'Win Now' strategic priorities are designed to reposition the business and drive long-term shareholder value. These initiatives focus on leading with sport through athlete storytelling, performance products, and big sport moments. Elliott Hill, the President and CEO of NIKE, Inc., has emphasized the importance of these priorities, stating that the progress made against these goals reinforces his confidence in the company's direction.

The effectiveness of these initiatives can be seen in the company's financial performance. For instance, in the fiscal 2025 third quarter, NIKE Direct revenues were $4.7 billion, down 12 percent on a reported basis and down 10 percent on a currency-neutral basis. However, the company's gross margin decreased 330 basis points to 41.5 percent, primarily due to higher discounts, higher inventory obsolescence reserves, higher product costs, and changes in channel mix, partially offset by restructuring charges in the prior year. This indicates that while the company is facing challenges, it is also taking steps to address them through restructuring and other cost-cutting measures.

Dividend Sustainability: A Closer Look

Nike has a strong track record of consistently increasing returns to shareholders, including 23 consecutive years of increasing dividend payouts. In the third quarter, the Company returned approximately $1.1 billion to shareholders, including dividends of $594 million, up 6 percent from the prior year, and share repurchases of $499 million. This indicates that Nike is still committed to returning value to shareholders, even in the face of financial challenges.

However, the decline in revenues and earnings per share raises questions about the sustainability of this dividend payout strategy. If the company continues to face financial challenges, it may need to reconsider its dividend policy to ensure long-term financial health. For example, Nike could choose to reduce its dividend payout ratio or suspend dividend increases until its financial performance improves. This would allow the company to retain more earnings to invest in growth opportunities and improve its financial position.

The Dividend History: A Reliable Income Stream

Nike's dividend history is a testament to its commitment to shareholders. The company has been paying out quarterly cash dividends to its shareholders since 1985. Moreover, it has increased its dividend for 15 consecutive years, which puts it on pace to become an S&P 500 dividend aristocrat. From its 1985 to 2019 after adjusting for its stock splits, Nike paid out quarterly dividends ranging from 0.5 cents per share in 1985 to 88 cents per share in 2019.

Red Flags to Watch

While Nike's strategic initiatives and long-term vision are encouraging, there are some red flags to watch. The decline in revenues and earnings per share is a concern, and the company's gross margin has decreased significantly. Additionally, the company's inventory levels have increased, which could indicate potential challenges in managing its supply chain.

Alternatives if Rates Rise

If interest rates rise, dividend stocks like Nike could face headwinds. In this scenario, investors may want to consider alternative income-generating assets, such as bonds or real estate investment trusts (REITs). These assets can provide a steady income stream and may be less sensitive to changes in interest rates.

Conclusion

Nike's recent financial performance, particularly the decline in revenues and earnings per share, poses a significant challenge to its ability to sustain and grow its dividend payouts. However, the company's strategic initiatives and long-term vision make it a compelling buy for income-seeking investors. While there are some red flags to watch, Nike's strong brand and commitment to shareholders make it a reliable income stream. As always, it's important to do your own research and consider your investment goals and risk tolerance before making any investment decisions.

Ask Aime: What impact will Nike's strategic initiatives have on its dividend sustainability?