Nike (NKE 3.65%) is giving its shareholders a raise. The sports apparel giant recently announced a 12% hike to its dividend that will push the annual payout to $1.10 per share in 2021 compared to $0.70 per share in 2017.
Wall Street usually greets dividend hikes as good news since they mean more direct cash returns and imply improving finances. But there's a few things investors should know about Nike's new payout.
1. Nike can afford it
The pandemic caused a rare earnings slump in Nike's last fiscal year that ended in late May, with profits diving 37%. Operating results rebounded sharply over the following months, but the dividend wasn't in serious jeopardy, even during the worst of the COVID-19 related slump.
Nike's operating cash flow last year was $2.5 billion and while that figure dove from $5.9 billion a year earlier, it was still easily enough to cover its $1.5 billion annual dividend commitment.
That cushion widened in the first quarter of fiscal 2021 that runs through August as Nike nearly returned to global sales growth and notched 11% higher earnings. The industry leader is currently flush with cash from both its operating rebound and additional debt it took on during the first phase of the pandemic.
2. It fits right in with the recent past
Nike's announcement fits right in with its recent track record. Management announced an 11% increase a year ago and raised the dividend by 10% in late 2018. On each occasion, the executive team highlighted its priority of funding steadily increasing payouts through rising cash flow.
Nike has now raised its dividend for 19 consecutive years, putting it one step closer to qualifying as a Dividend Aristocrat after its 25th annual hike. That exclusive list doesn't include many apparel specialists, in part because the industry is volatile even during normal economic cycles.
The COVID-19 slump added even more pressure, including by forcing TJX Companies to pause its dividend following 23 consecutive years of steady increases.
3. The dividend raise implies a strong earnings report ahead
Investors already had some good reasons to expect a solid Q2 earnings report from Nike after the company revealed sharp demand rebounds in both China and the U.S. last quarter. Executives suggested that they see room for many years of expanding profitability, too, as an accelerated shift toward e-commerce spending lessens the drag from its wholesale selling channel.
Nike has said that direct-to-consumer sales often carry double the gross profit margins from sales to retailing partners, and the company has plenty of room to boost that business. lululemon athletica (LULU 12.82%), for example, gets over 61% of its business from the online segment. That rate was closer to 30% before the pandemic struck, but most retailers expect fundamentally higher digital sales even after the COVID-19 threat fades.
Look for Nike to highlight that booming direct-to-consumer business when it announces Q2 results on Dec. 18. The dividend boost might even telegraph the restart of the stock buyback program that management paused in March. But even if it waits until after the holidays to resume repurchase spending, Nike clearly has the resources to deliver more cash to its shareholders in 2021.