Nike Is a Prosocial Stock, So Just Do It

Nike (NYSE: NKE  ) has been on my radar for quite some time for the real-money, socially responsible Prosocial Portfolio I manage for, since it brings an interesting and important strategy to the game. This massive athletic gear maker represents a ubiquitous brand, but behind the scenes, it brings far more to the world than its trademark Swoosh.

For investors who aren't interested in factors that do double duty in boosting business and being more positive in the world, Nike still sports a lot to like. The giant's $65 billion market cap certainly shows it's no upstart. However, large, established companies can indicate a certain degree of stability as long as they remain strong and innovative.

Nike brings many factors into the investment thesis. We already know Nike through its athletic shoes, an expansive array of athletic gear, and high-profile athlete endorsements. Let's also consider the ways Nike is spreading sustainability -- and focusing on how to reduce costs in the future.

Comfortable shoes for portfolios
Nike is one of those companies that is a force to be reckoned with. In fact, when it comes to athletic footwear, clothing, and equipment, it is, in fact, No. 1.

Subsidiaries' brands include Converse, Chuck Taylor, and Hurley. Its products are sold in nearly all countries in the world, its wares are distributed in more than 750 retail stores, and it provides jobs to about 48,000 people .

Maybe Nike's stock doesn't feel like a dazzling "new shoes" pick, unlike small and scrappy rival Under Armour, which, of course, is a pricier stock but a high-growth business that is a competitive threat. However, sometimes we would all like the more comfortable shoes, as long as the toes aren't popping through.

Nike's financial growth isn't slack, and it's been ticking along in its growth over the years. In the last 12-month period ended in February, it had generated top-line growth of $27 billion, an 8.9% increase. Earnings per share increased 17% to $2.96 per share, and growth has been consistently ticking upward over the years. Its gross margin in that time frame was 44.3%.

Here's another thing I love to see in a company: a strong balance sheet. In the last 12 months, Nike's debt-to-capital ratio was a mere 10.7%. In addition, Nike generates copious free cash flow. Last but not least, Nike's a dividend payer.

Innovator and disruptor
I look for as many socially responsible factors as I can, and while I sometimes recommend some smaller, riskier companies, I like to also think about the diversification of larger companies. Given larger companies' scale, they can move the needle in the world around them. When they choose to do that for the good, that's a wonderful and defensive combination.

For the pure business side of things, Nike's management isn't lying down on the will to continue to be an innovator as times change. In 2013, Nike made No. 1 on Fast Company's annual list of most innovative companies. This year, Nike dropped a few notches to No. 7. However, for a company that's been kicking out the kicks since 1964, that is a crazy accomplishment.

President and CEO Mark Parker has no plans to let Nike throw the race and rest on its own laurels. Fast Company interviewed him in 2012, and his comments show he has been involved in an evolutionary plan of attack for years now.

Parker doesn't want to rely on celeb endorsements and existing brand. In his own words: "At a big company, often size turns into constipation, it fogs the lens about what's really happening. Sometimes with size and success comes the notion that since we've done things to be successful, we have the formula and can institutionalize it. That can be death."

The Prosocial part
According to Ceres, a nonprofit organization that brings together corporations, investors, NGOs, and other stakeholders into the sustainability conversation, Nike is one of the corporate leaders going aggressively into the area. Such industry leaders are, so far, too few and far between.

One way Nike is showing leadership and innovation: sustainability. Its Flyknit running shoe material not only generates two-thirds less waste than other shoe options, it also saves Nike production costs. Flyknit has evolved into a material used in a football boot since its invention after serving for running and basketball shoes.

On a larger, global level, in 2013, Nike catapulted the MAKING app out into the world. Designers can consult the simple mobile app when brainstorming sustainable design decisions.

The app uses Nike's Materials Sustainability Index, which was created after some of its employees tracked and rated about 75,000 different materials over time to track and rate environmental ramifications and sustainability.  .

Nike's recent corporate sustainability report does what many companies still don't want to do. It outlines the business risks and opportunities at hand, examining its supply chain, and the negative impacts it can have, based on production components.

The company says it's paying attention to meta-trends in the sustainability area, strong signals of the challenges, risks, and opportunities that it needs to address in its business. These meta-trends include issues such as water scarcity, materials cost inflation, climate change, and rising labor costs, as well as increased transparency and heightened levels of collaboration.

Nike also sees the opportunities in tackling these challenges. In text from its CSR discussion:

  • We develop and use more recycled and more sustainable materials, and leaner manufacturing processes.
  • To decrease our exposure to labor cost inflation and capacity constraints, we increase the efficiency of our supply chain.
  • We have developed superior materials such as water-based adhesives through green chemistry, which also delivers health and safety benefits to workers.

These types of innovations have already delivered substantial benefits to our business, and we expect them to increase in the coming years.

The truth is, Nike has outlined a mind-boggling amount of data on risks and opportunities, and these are the types of factors that many companies will face.

More than a Swoosh
The selection of products carrying the Nike name and logo is expansive; we can see that impressive power just going out into the world and seeing folks who are taking the advice to "just do it" on the road to better health.

However, the research and attention it's been giving to areas in sustainability is impressively expansive, too. Whether the athletic giant is shoring up its own business for a time of resource scarcity, saving money by conserving or recycling materials, or reducing energy costs, it's good for business. Even more amazing, its MAKING app and MSI show that it's not even trying to hoard its sustainability secrets to itself.

Buying Nike gives investors an array of positive factors to add into their portfolios; we haven't even addressed the growing American trend of health and exercise, which involves a heck of a lot of people who will want to get gear for their increasingly sports-oriented lifestyles. That's a core part of the case for Nike too, but a more obvious one.

Nike's got more than the Swoosh -- it's got the future of sustainable business well in hand as well.

More dividend payers to boost your portfolio
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  • Report this Comment On May 23, 2014, at 10:03 AM, damilkman wrote:

    As an avid basketball player I have always had issues with Nike. I would sometimes play ball with kids from the projects. They might not have anything else, not even three square meals. But they would have multi hundred dollar shoes on their feet from Nike. I have also disapproved of Nike's conduct in AAU and amateur athletics. If amateur athletics fails as a major participation sport which some distant forecasters surmise companies like Nike who saw the dollars in promoting, manipulating, and ultimately using kids will be part of it.

    Nike like Starbucks may make their product in an organic, sustainable and ethical way. But any company that preys on the insecurities and weakness of the human character can never be considered truly ethical by me.

  • Report this Comment On May 23, 2014, at 2:09 PM, TMFLomax wrote:

    Thanks for your thoughts on this one, damilkman. That's an interesting angle I hadn't thought about.

    I would agree that some things that feel like "status" to all kinds of people and can sadly seem like a priority as opposed to other things (sometimes even basic needs).

    As of now, I do think that through marketing/advertising, a lot of companies still do prey on "the insecurities and weakness of the human character." I think there's a shift underway in that area as well, but, it is one of the "effective" things companies have done for decades to lure customers.

    Anyway, I appreciate the thoughts on other aspects that other people might find ethical or not about Nike and other companies.



  • Report this Comment On May 27, 2014, at 2:25 AM, mhammond00 wrote:

    If Nike dropped the price of all its top of the line basketball shoes, do you think those kids would still buy them, damilkman? Or would they find some other status symbol to spend too much on?

    I bet you'd see Adidas becoming the new "it" brand. (and I wouldn't blame Adidas one bit for 'preying on the insecurities of the human character').

    I just have a hard time seeing people as victims with no free will - not even the people whose buying habits I find to be irresponsible. They have their reasons and far be it from me to judge.

  • Report this Comment On May 28, 2014, at 2:43 PM, broadmoor wrote:

    As a result of the profit motive, the world of "socially responsible" investing is not only subjective, but also rife with rationalization, inconsistency, and hypocrisy. As one regularly engaged with all four, I can state with assurance that this is the case,

    Nike has a history of treating its Asian and Pacific workforces with horrendous indifference and cruelty. Granting relativity, and the geographical and qualitative (quantitative?) social, cultural and economic differences, is Darden a fair analogy? Does the fact that Nike now, essentially, acknowledges this backstory, and has undertaken steps to somewhat rectify it, mitigate matters sufficiently to allow its efforts towards sustainability to permit it to be characterized as "prosocial"?

  • Report this Comment On May 29, 2014, at 1:32 PM, damilkman wrote:

    I often put my Feyerabend hat on when we discuss ethics. I agree with mhammond00 something is going to be the status symbol. But someone promoted something to be a status symbol that ultimately has no real worth. But even taking broadmoor's argument the desperately poor know only one thing. It is better to work. Us First Worlders for example deplore child labor. Yet for most of human history including the most of the history of the United States children worked. My grand parents all came from farms and they worked as children.

    The bottom line is that ethics often is perspective. I recall Star Trek IV when McCoy was screaming at the doctors for being barbarians because they cut into people. Well if your only tool is a knife what else can you do? Easy for us to judge when we have the luxury of a wealthy country to guarantee a minimum ceiling. Yet there are places in the world if you do not work, you starve, and that includes children, just as it was in the frontier days of the United States.

  • Report this Comment On June 03, 2014, at 9:44 AM, broadmoor wrote:

    "........the desperately poor know only one thing. It is better to work."

    That is clearly true, and fair enough, but irrelevant to the discussion of whether Nike can truly be characterized as "prosocial." Is it, and yes, you brought it up, the industrial companies who utilized child labor during the industrial revolution, exempt from criticism for their viciously exploitative treatment of workers, simply because people absolutely needed the jobs they offered?

  • Report this Comment On July 16, 2014, at 8:42 AM, KBecks wrote:

    Hi Alyce, I remember Nike being into recycling for a long, long time. I also like Nike's positive advertising messages, encouraging people to be active. Nice addition to your port.

  • Report this Comment On January 07, 2015, at 1:15 PM, funcioneitor wrote:

    if nike is number one in anything is precisely in lack of ethics. exploitation of children can increase earnings, but doesn't make you eligible for ethical portfolios, in my opinion.

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Alyce Lomax

Alyce Lomax is a columnist for specializing in environmental, social, and governance (ESG) issues and an analyst for Motley Fool One. From October 2010 through June 2015, she managed the real-money Prosocial Portfolio, which integrated socially responsible investing factors into stock analysis.

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