With the S&P 500 near record territory, investors might think that there aren't compelling buying opportunities being served up right now. While that's a rational way to think, it's just not true. Even some dominant and well-known businesses have taken a hit in recent times.
For example, there's one dividend stock that's currently 47% off its peak price, which was set in November of 2021. Does this dip mean you should buy shares hand over fist right now?
Nike's solid track record
In November last year, Nike (NKE +0.09%) announced a quarterly dividend of $0.37 per share. This meant it was the 22nd straight year that the business raised its payout. There are few companies out there that can match that kind of track record of providing a rising income stream over such an extended period of time.
Credit goes to Nike's strong underlying fundamentals, as exemplified by steadily increasing sales and earnings. In the past decade, between fiscal 2013 and fiscal 2023, revenue rose at an annualized pace of 7.3%, while net income increased at a 7.4% yearly clip. And a solid double-digit operating margin helps result in profitability that can fund those dividends.
A company that has been as successful as Nike has over decades, and has come to dominate its industry, certainly possesses a wide economic moat. In this particular case, it's the brand that truly differentiates this business from rivals. Thanks to its top-notch marketing and storytelling, coupled with high-profile athletes' endorsements, Nike has found a way to remain at the top of consumers' minds.
NYSE: NKE
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Ongoing challenges
It hasn't always been smooth sailing for Nike -- and definitely not in recent times. The global economy continues to create an uncertain environment. Interest rates haven't been this high in quite some time. And consumers are still worried about inflation crushing their spending power.
Nike sells popular footwear and apparel, but these can be viewed as discretionary products. And when times get tough for consumers, these items move lower down the priority list of things to buy.
Once you understand this backdrop, it makes sense that Nike's revenue was flat year over year in the third quarter (ended Feb. 29). Management believes sales will rise by just 1% for the full fiscal year.
That would represent a major slowdown from what shareholders have grown accustomed to. And it would substantially underperform Nike's long-term target of yearly revenue growth in the high single digits to low double digits.
Nike's challenges are more troubling when you start to wonder if they might simply be specific to this business. Formidable rivals in China are posting healthy growth. And Lululemon Athletica, a key competitor here in North America, continues to report double-digit revenue gains.
Investor perspective
Despite Nike's recent issues, income investors might have their eyes on this stock. Paying a dividend that has a 22-year increase streak is impressive, even if the current yield is just 1.6%. And given that the payout ratio is 48%, there appears to be plenty of room to continue increasing the payout for the foreseeable future.
That's where the positive commentary ends. Nike is set up right now to disappoint investors in the next few years, particularly those who want to beat the S&P 500 over the long term. Shares are well off their high, but they still look expensive, trading at a price-to-earnings ratio of 27.5. I don't feel comfortable paying that kind of premium valuation for a business that's struggling.
I think the best course of action for investors is to add Nike to their watch list and continue monitoring for signs of fundamental improvements. This means waiting until sales start to pick up. Maybe then you can revisit the question of whether or not the stock is a smart buy.
