It's been a monster year for the Dow Jones Industrial Average, with the index up nearly 12% year to date and hitting a new all-time high in September. But not all of the Dow components has shared in this success. Athletic shoe and apparel maker Nike (NKE +1.55%) has been a major loser -- down over 23% year to date to make it the third worst-performing stock in the index behind only Boeing and Intel.

Here's what's driving the Dow's surge, Nike's weak performance, and whether the dividend stock is a buy now.

Image source: Getty Images.

Drivers of the Dow

The Dow got off to a slow start in 2024 as big gains in megacap growth stocks carried the S&P 500 and Nasdaq Composite to new heights. But over the last three months, megacap tech has cooled off, and the Dow is outperforming the S&P 500 and Nasdaq Composite with a 7.6% gain compared to 4.3% for the S&P 500 and just 0.2% for the Nasdaq Composite.

There have been a lot of big moves in some of the Dow's highest-weighted names. The Dow is a price-weighted index, so companies with higher nominal stock prices carry the highest weightings. In the past three months, Home Depot, McDonald's, Caterpillar, and UnitedHealth are all up between 17.9% and 21.7%. Collectively, these four names comprise over a quarter of the Dow and are largely responsible for the index's recent rally.

Blue-chip dividend stocks don't normally make these large of moves in a short period. However, investor expectations are generally why these names have been doing well. Lower interest rates could help drive consumer spending, which is excellent news for McDonald's. Lower mortgage interest rates could lead to a surge in home improvement projects delayed due to inflationary pressures -- helping Home Depot.

Caterpillar has undergone a multi-year boom and is delivering record earnings. The cyclical company's growth was cooling off, but lower interest rates and China's stimulus package could be just what Caterpillar needs to extend its expansion period.

And finally, UnitedHealth remains a quality dividend stock with a low payout ratio and tons of stable earnings power. Analyst projections for 2024 call for $27.71 in earnings per share (EPS) followed by $31.17 in 2025 EPS -- implying that UnitedHealth can continue making sizable dividend raises.

In sum, well-run companies were being dragged down by inflationary pressures. But now, these companies look like coiled springs for growth as the economic cycle changes. However, Nike is not in that camp.

Nike is in prove-it mode

There's no sugarcoating that Nike is in desperate need of a turnaround. Unlike businesses like Home Depot or McDonald's that were doing well before inflation got out of hand and are likely to resume growth in a more favorable economic climate, Nike won't magically flip a switch and return to growth just because interest rates are coming down or because it brought back former executive Elliott Hill and made him president and CEO.

This painful reality was displayed when Nike reported its fiscal 2025's first-quarter results on Oct. 1 for the period ended Aug. 31. Revenue was down 10%, including a 13% decline in Nike Direct revenue -- the company's direct-to-consumer (DTC) arm. Gross margin increased slightly to 45.4%, but diluted earnings per share were down 26% to $0.70.

For context, that's the lowest first-quarter diluted EPS print since 2019.

Data source: Nike. All columns are for the fiscal first quarter, ended Aug. 31.

As you can see in the table, Nike's revenue and gross margins have flatlined while its earnings are down. The company is failing to deliver meaningful results from its DTC business or wholesale -- putting pressure on management to make strategic changes.

On its earnings call, Nike announced it was scrapping its full-year guidance and postponing its investor day to give its new CEO flexibility to reconnect with employees and the business. It's a fair decision, but it leaves already disgruntled investors even more in the dark.

However, Nike did provide second-quarter guidance of an 8% to 10% decrease in sales and a similar decline in gross margins as we saw in the first quarter. In sum, Nike is giving investors few reasons to be optimistic about the business's short-term improvement.

From growth to income and value

As Nike's stock price has languished, its dividend yield has gone up. In November 2023, Nike announced a 9% dividend increase -- marking the 22nd consecutive year the company raised the dividend. Nike now yields a respectable 1.8% -- which is higher than the yield of the Dow or S&P 500.

Nike's valuation has also come down. Nike's price-to-earnings ratio is now under 25, whereas its median P/E was over 31 in the last three-year, five-year, seven-year, and 10-year periods.

Nike has gone from an in-favor growth stock with a premium valuation to a floundering company with a yield higher than the market average and a valuation less expensive than the market average.

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NYSE: NKE

Nike

Today's Change

(1.55%) $0.65

Current Price

$42.53

Key Data Points

Market Cap

$62B

Day's Range

$41.36 - $42.74

52wk Range

$41.35 - $80.17

Volume

575K

Avg Vol

21M

Gross Margin

40.57%

Dividend Yield

3.87%

Nike is littered with question marks

Nike is a good lesson in why a name-brand company with a beaten-down stock price won't automatically rebound with the broader market. Unlike its Dow peers, which fell largely due to economic conditions, Nike is facing internal challenges as well as the economic backdrop.

The further it falls, the more appealing Nike may look to patient investors looking for turnaround candidates. After all, with so much bad news already in the open, Nike stock could begin to recover even if the company reports mediocre results. And the dividend is a worthwhile incentive to hold the shoe and apparel maker through periods of volatility.

However, some investors may prefer to take a wait-and-see approach to Nike until it shows more concrete signals that the business is improving, more clarity on its strategic direction under new management, and better insight into whether the company can return to growth in fiscal 2026.

Years from now, we could look back at this as a great time to scoop up shares of Nike, but investors who buy the stock now should do so with the understanding that it could be highly volatile and continue lagging behind the broader indexes in the near term.