Just a few well-placed investments can sometimes be enough to make you rich. Iconic footwear and apparel maker Nike (NKE 0.28%) is a good example. Investors who put $10,000 into the stock 20 years ago would now have $290,000 with dividends reinvested. Putting this into perspective, that's 11 times higher than the $26,000 that the same amount invested into the S&P 500 index would have become by now.
And even with these outsized gains, Nike stock still looks like a buy for dividend growth investors. Let's dive into the company's fundamentals and valuations to better understand why.
Revenue and earnings surged higher again
Nike is the largest sporting goods company in the world by far. Putting this into perspective, the company's $197 billion market capitalization is quintuple the $39 billion market cap of its next-closest peer, Lululemon Athletica (NASDAQ: LULU). The company has sponsorships deals with many of the greatest athletes of all time, including Michael Jordan, Tiger Woods, and Derek Jeter.
Nike's total revenue surged 17.2% higher year over year to $13.3 billion for the second quarter ended Nov. 30, and Nike's revenue was up 27% on a currency-neutral basis during the quarter. But because the company derived more than half of its revenue outside North America, Nike experienced major foreign currency translation headwinds from the stronger U.S. dollar. This explains why total revenue growth lagged well behind currency-neutral revenue growth.
What was behind the company's impressive growth in the quarter? This was driven by mid-single-digit currency-neutral growth in Greater China and firmly double-digit currency-neutral growth in every other geographical area. The company's Nike brand digital sales soared 34% higher on a currency-neutral basis, which was once again the biggest driver of growth. In an era focused on convenience, Nike's decision to build out its digital infrastructure is really paying dividends.
The company reported $0.85 in diluted earnings per share (EPS) for the second quarter, which was a 2.4% growth rate over the year-ago period. Due to inflationary pressures, Nike's cost of sales increased 23.8% year over year to $7.6 billion. This is why the company's net margin declined almost 180 basis points over the year-ago period to 10%. Nike's dip in profitability was partially offset by a 2.8% reduction in its outstanding share count. These factors account for the company's diluted EPS growing at a slower rate than total revenue during the quarter.
As Nike focuses on upgrading its higher-margin digital sales network, analysts predict that diluted EPS will compound at 6.8% annually over the next five years. If anything, this could certainly be a conservative estimate in light of Nike's double-digit annual earnings growth in recent years.
Image source: Getty Images.
Nike sports a robust dividend growth rate
Nike's 1.1% dividend yield isn't too attractive when compared to the S&P 500 index's 1.7% yield. But the company compensates for the low starting dividend yield with a high dividend growth rate. The quarterly dividend per share of $0.34 has nearly doubled from the $0.20 dividend that was paid just five years ago.
The company's dividend payout ratio will come in around 41% for the current fiscal year. This should allow Nike to retain enough capital to invest in future growth opportunities, reduce debt, and execute share buybacks. That's why I believe that double-digit annual dividend growth can continue for the foreseeable future.
World-class quality at a justified premium
Nike is a fundamentally healthy business. Unsurprisingly, the stock's valuation reflects this reality. Nike's forward price-to-earnings ratio of 40.7 is well above the S&P 500 apparel retail industry's average of 22.6. This is at the very top end of what I believe to be a rational premium for ownership in a superb business. Investors looking to beat the market over the long haul would be wise to consider buying shares of Nike now and adding on any weakness in the future.
