Most investors buy shares of great companies looking for growth in the share price. Some are looking more for a consistent source of passive income in the form of dividends. And then there are those who want the best of both worlds: steady growth as well as a rising dividend.
This is where companies like Nike (NKE 2.05%) come in. The sports footwear and apparel giant commands strong loyalty from sports enthusiasts and athletes and has a long track record of innovation for its wide range of products. Many investors may know Nike as a strong compounder over the years, but they may not be aware of its growing dividend payments.
Is Nike a dividend payer for the long run? Let's find out if the business behind the Swoosh qualifies as a great dividend stock.
A resilient business
When the novel coronavirus spread around the globe this year, Nike was forced to temporarily shut the majority of its stores. However, the business has proven resilient, as shown by its latest earnings report. Although revenue fell to $10.6 billion for the period ending Aug. 31, a decline of 1% year over year, net income rose 11% to $1.5 billion. Of particular note was Nike's digital sales, which surged by 82% year over year, allowing the company to post a strong sales recovery even though most consumers were still hunkered down.
Nike's digital transformation deserves the applause here. The company has a range of apps that allow customers to continue engaging and connecting with their favorite brand. One of these is the Nike Training Club, which saw an all-time high percentage of member use for daily workouts. Another is the Nike Run Club, which has clocked more than 1 million downloads each month for four consecutive months for audio-guided runs.
And it doesn't stop there. Nike has ambitious plans to integrate more digital aspects into its physical stores, as management believes that digital is the future of retail. The aim is to continually engage customers to offer them a personalized shopping journey in an omnichannel marketing strategy (that is, it combines elements of both digital and physical retailing).
A strong run of dividend increases
The chart above shows Nike's impressive dividend growth over the years. The 10-year history does not quite do the company justice, however. Nike recently announced yet another quarterly dividend increase from $0.245 to $0.275, taking the total dividend for this fiscal year from $0.955 to $1.10 (Nike's fiscal year began June 1).
Interestingly, this announcement marks the 19th consecutive dividend increase from the company, bringing it ever closer to becoming a Dividend Aristocrat. A Dividend Aristocrat is defined as a company in the S&P 500 index that has raised its dividend over 25 consecutive years.
A free cash flow powerhouse
If you're curious as to what's powering this impressive dividend streak, take a look at the chart above, which shows Nike's free cash flow history over the last 10 years. The company has been consistently churning out healthy levels of free cash flow over the past decade, even with continual investments in its innovative product line and digital capabilities.
For fiscal 2020, which ended May 31 with many of the company's stores still closed, the business still managed to eke out free cash flow of $1.4 billion.
A star performer
The key ingredients that make Nike a superb dividend stock are all present: an innovative product line that promises continuous improvements to athletes' performance, strong digital capabilities that allow the business to remain resilient in the face of the worst pandemic in a century, consistent free cash flow generation, and a stellar track record of paying out increasing dividends.
Nike's share price has naturally also risen in tandem with the company's improved performance, shooting up more than sixfold from around $21 back in late 2010 to around $139 currently. Although Nike's current dividend yield may look low at 0.8%, it's important to remember that Nike has an impressive track record of raising its dividends. Over the last decade, dividends have grown at a compound annual growth rate of 14%. Assuming this carries on into the future, Nike would be paying out $4.08 in annual dividends by 2030, which translates to a decent 2.9% yield at its current price.
Investors can count on the company to continue reporting steady growth numbers even though the pandemic has not been brought under control. With its strong digital presence and understanding of how the future of retail is going to be, I am confident that investors will be rewarded with increasing dividends over the long term.