G
Source: Nike.

Two years ago, Nike (NYSE:NKE) announced that it would return $8 billion to shareholders through a massive stock repurchase program, greatly expanding its previous $5 billion program. At the time, many investors believed that the move would be another example of how companies get too optimistic after solid performances, as the stock had more than doubled from its 2009 lows.

Last week, though, Nike showed how prescient it was with its expanded buyback. In Nike's fiscal first-quarter earnings report, the athletic giant continued its string of strong top-line growth, expanding revenue by 15% from year-ago levels and posting 27% growth in earnings per share. Despite the obvious value of Nike's strategic efforts to boost its popularity and the value of its global brand, spending billions on buybacks has undoubtedly played its own role in contributing to the stock's advance. Let's take a look at Nike's share repurchase program and whether future buybacks make sense.

The success of Nike buybacks

When you look back 10 years, you can see that Nike has done reasonably well at timing its share repurchases. Just before the financial crisis in early 2008, Nike made what seemed at the time to have been a mistake in ramping up its buyback efforts, but even with the losses that the athletic company suffered during the market meltdown, shares regained those losses by early 2010.

NKE Chart

NKE data by YCharts

Since then, Nike has done a good job with its purchases, ramping them up in 2010 and 2011 during pauses in the stock's ascent and then slowing its repurchase activity when shares soared. Yet earlier this year, Nike committed more of its four-year $8 billion war-chest toward buybacks, and even as that move earned some of the same skeptical responses as 2012's authorization, Nike's recent results validate the move as having been immensely profitable for the company.

Are buybacks affecting Nike's growth?

Returning money to shareholders has the obvious consequence that Nike doesn't have that money to invest in the growth of its business. But so far, buybacks don't seem to have stopped Nike's top-line growth, and the company has specifically noted the positive effect of share repurchases on earnings per share figures.

For instance, in last quarter's report in June, Nike noted that the drop in the number of shares outstanding as a result of its repurchase activity directly contributed to the company's rising earnings per share, and much of the 11% EPS gains for the entire fiscal year came as a result of share-count reduction causing Nike's net income to be spread across fewer shares in determining EPS.

Certainly this quarter, buybacks don't appear to have held Nike back at all. Sales in the Western European region soared by 32%, with shoe sales climbing 36% in the wake of the 2014 World Cup and its huge exposure for Nike's soccer offerings. China showed revenue growth of 18%, and solid 12% performance in North America also built on past gains in Nike's home region. Nor do future prospects appear to be slowing, as Nike reported double-digit percentage gains in future orders throughout North America and Europe. Even as competitors Under Armour (NYSE:UAA) and Adidas (NASDAQOTH:ADDYY) have fought for their places in the athletic apparel and footwear industry, Nike hasn't seen much resistance in its own growth efforts.

Nke Shoes
Source: Nike.

Why doesn't Nike pay a bigger dividend?

One criticism of Nike is that while it's a big proponent of stock buybacks, it doesn't like to pay sizable dividends to its shareholders. Currently, the stock yields just 1.2%, and even though Nike has put together a 12-year streak of boosting its dividend payout annually, the pace of its dividend growth hasn't kept up with the explosive gains in Nike's stock price.

Nike pays out less than a third of its earnings to shareholders in the form of dividends, clearly showing that the company prefers the greater flexibility of stock buybacks. As long as the company can keep growing at its current pace, investors won't complain much about poor dividend yields. But in the long run, Nike will probably have to think twice about changing its focus from buybacks toward dividends in order to satisfy all of its shareholders.

The long-term victory for Nike's buybacks

The size of Nike's stock repurchases has had a marked impact on its capital structure. A decade ago, Nike had almost 1.1 billion shares outstanding. Now, it has fewer than 900 million, and Nike plans to keep moving forward with its overall capital strategy. As Nike CFO Don Blair said earlier this year, Nike's strategy "is to continuously increase the level of cash returns to our shareholders."

At some point, Nike's stock will pull back, and that will inevitably raise cries that the company's buyback was too aggressive. But at least for now, Nike is firing on all cylinders, with efforts to improve its internal efficiency having a positive impact on margins. Broad strategic moves like targeting women's athletic wear and taking greater advantage of its direct-to-consumer channel give Nike the potential for even larger gains in the future. In that light, Nike's buybacks have given shareholders a huge win, taking advantage of lower prices in past years to score big gains for the company as a whole.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Nike and Under Armour. The Motley Fool owns shares of Nike and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.