Brand value is a measure of just how dominant a company is in its respective industry. That’s because the higher a company’s brand value, the more well-known and sought after its goods or services often are.
With an estimated brand value of $33 billion as of last year, Nike (NKE 2.12%) is the 49th most valuable brand in the world. Among retail and consumer goods companies, the apparel and footwear manufacturer is the ninth most valuable brand on the planet.
This has made the stock a tremendous pick for growth investors in the past. And the stock arguably remains an attractive option moving forward. Here’s why.
Elevated costs weighed on profitability
Nike has established itself as the leading sporting goods company. The apparel and footwear maker has built its brand value in part through the sponsorships of legendary athletes, such as Michael Jordan.
Nike’s total revenue vaulted 14% higher over the year-ago period to $12.4 billion during the third quarter, ended Feb. 28. Given the company’s status as a truly global brand at a time when the U.S. dollar has been comparatively stronger than foreign currencies, its results were even more impressive. Factoring out foreign currency translation, Nike’s currency-neutral revenue grew at a 19% rate for the quarter.
Investments in its direct-to-consumer (DTC) growth strategy have paid major dividends in recent years. The company’s Nike Direct sales channel reported 22% top-line growth in Q3, which was largely due to a 24% surge in Nike Digital revenue. This was meaningfully faster than the wholesale growth rate of 18% during the quarter.
And as Nike Direct revenue continues to compound at a faster rate than the wholesale business, it will become a larger portion of the business. Since Nike’s digital gross margins are superior to the wholesale channel, this should lead to improved profitability over time.
On the bottom line, the company’s diluted earnings per share (EPS) dipped 9.2% year over year to $0.79 for Q3. Nike’s inventory glut and the expenses that go along with it (like storage) led cost of sales 20.9% higher in the quarter. Coupled with faster-than-revenue growth in total selling and administrative expenses, this led to a 280-basis-point decline in net margin to 10% during the quarter. A reduction in the company’s diluted share count wasn’t enough to overcome this drop in profitability. That’s why diluted EPS growth came in well behind total revenue growth for the quarter.
Looking out over the next five years, analysts anticipate that Nike will deliver 8.6% annual diluted EPS growth. Considering the company’s track record of outperforming analysts’ expectations, this could prove to be an overly cautious growth estimate.
A dividend payout ratio with room to run higher
Nike’s 1.1% dividend yield is significantly below the S&P 500 index’s 1.7% yield. Based on these data points, the stock isn’t a conventional income play. But its payout growth over the last 10 years certainly makes Nike a dividend growth play; its dividend per share has skyrocketed 224% higher during that time.
NKE Dividend data by YCharts
The good news for investors who weren’t shareholders over that period is that similar dividend growth appears poised to persist. This is because Nike’s dividend payout ratio will clock in at approximately 40% for the current fiscal year that will end in May. That gives the company the funds needed to keep investing in the business, repurchasing shares, and repaying debt. This is why I’d be shocked to see any less than double-digit annual dividend growth over the medium term.
The valuation is buyable
Nike’s unparalleled brand recognition and DTC growth strategy bode well for the future. The stock’s valuation isn’t a bargain — but it isn’t unreasonably high, either.
Nike’s Shiller price-to-earnings (P/E) ratio of 44.4 is in line with the 10-year median Shiller P/E ratio of 44.2. This valuation measure considers inflation-adjusted company earnings over the last 10 years, which is a time period that is thought to represent a full, peak-to-trough economic cycle. This is why I believe growth investors should dip their toes into Nike at the current $121 share price and buy into any sell-off moving forward.