Company Description: Nike, Inc. is the world's leading designer and marketer of high-quality athletic footwear, athletic apparel and accessories.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
NKE is trading at a premium to all four valuations above. When also considering the NPV MMA Differential, the stock is trading at a 40.0% premium to its calculated fair value of $41.3. NKE did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
NKE earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. NKE earned a Star for having an acceptable score in at least two of the four Key Metrics measured.
Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (2007-2010, 2008-2011, 2009-2012, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1984 and has increased its dividend payments for 15 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
The NPV MMA Diff. of the $862 is below the $2,000 target I look for in a stock that has increased dividends as long as NKE has. If NKE grows its dividend at 15.0% per year, it will take 7 years to equal a MMA yielding an estimated 20-year average rate of 2.79%.
Peers: The company's peer group includes: Crocs, Inc. (CROX) with a 0.0% yield, Deckers Outdoor Corporation (DECK) with a 0.0% yield and Wolverine World Wide, Inc. (WWW) with a 1.0% yield.
Conclusion: NKE did not earn any Stars in the Fair Value section, earned three Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks NKE as a 3-Star Hold stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $40.81 before NKE's NPV MMA Differential increased to the $2,000 minimum that I look for in a stock with 15 years of consecutive dividend increases. At that price the stock would yield 1.7%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,000 NPV MMA Differential, the calculated rate is 18.0%. This dividend growth rate is above the 15.0% used in this analysis, thus providing a no margin of safety. NKE has a risk rating of 1.75 which classifies it as a Medium risk stock.
NKE is the largest and most dominant player in the athletic footwear and apparel category. Despite an increasingly competitive global marketplace, the company enjoys strong financial and operating metrics largely as the result of its dominant brand. Its free cash flow payout 31% is well below my maximum 70%, while its debt to total capital of 9% is well below my maximum of 45%. The stock is currently trading above my calculated fair value of $41.30 and its current yield is well below my minimum, so for now I will remain on the sidelines.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I held no position NKE (0.0% of my Dividend Growth Portfolio). See a list of all my Dividend Growth Portfolio holdings here.
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Tags: NKE, CROX, DECK, WWW,
