If you’ve done much reading on this site, you are probably aware that I enjoy keeping watch lists on various sectors of the stock market. Nike Inc. $NKE not only resides on the consumer discretionary sector watch list, but has also made appearances on some of the high growth lists I’ve put together as well.
While Nike has been on my radar for some time, I have avoided purchasing it for two reasons:
- Valuation: Nike has generally traded with a PE in the high-20’s since I built my dividend growth portfolio in early 2013.
- Low Yield: Nike pays out just 30% of its earnings in dividends, which results in a yield below 1.5%.
When I first built my portfolio, I generally focused on the more traditional dividend growth companies yielding 2%+, like Coke, General Mills, Clorox, Chevron, etc.
However, now that I have a solid core of those types of companies built, I am branching out a bit and adding some “growthier” names to the mix. With another 25+ years until retirement, I don’t really need a high yield, because I am not living off of my dividend income at this time.
Furthermore, this portfolio is in a tax-advantaged account, so when it does come time for retirement, I am free to make trades swapping out for higher yield without any worries about any tax implications on capital gains.
Back to Nike, I mentioned that valuation was the main reason I hadn’t previously purchased shares in the company. I started my dividend growth portfolio in 2013, and looking at the F.A.S.T. Graph of Nike over the last few years, you can see that it has persistently traded above the “normal PE” trend-line during that time frame.
I missed out on an opportunity to buy lower in late 2016 due to my stubbornness in waiting for a “perfect” price. My goal was to buy PE at a 21 PE or lower, which was roughly $45 based on 2016 EPS of $2.16.
However, I am learning that valuation is a tricky metric, and is more shades of grey than a black & white number. I’ve been watching and waiting for Nike for some time now. Is it really worth passing up an opportunity to buy shares near their cheapest levels in four years simply because it hasn’t hit my magic number?
Credit goes to Seeking Alpha’s Godfather of DGI, Chowder, for pushing me off the ledge and convincing me to go get some. He too was watching the earnings release, and shared this commentary following it:
Let me be perfectly clear about NKE. If I didn’t have a position in NKE, I would today. Just because I didn’t add to it should have nothing to do with the decisions of others. If I were looking to buy an initial position or raise a current holding from a 1/4 sized position to a 1/2 sized position, I would do so today and not think twice about it.
I’m not saying NKE heads higher from here because I haven’t got a clue. What I do know is that NKE is a quality company selling at a reasonable valuation whose report wasn’t all that negative. That would justify a purchase for me if I were in a different situation.
Nike is a company that has produced 13.6% annual EPS growth going back to 2001, and hasn’t had a single year of negative growth during that time frame. It has grown earnings at a 12.6% rate over the last decade, and 14% over the last 5. Nike is also in excellent financial condition, as evidenced by the AA- credit rating granted by S&P.
Looking forward, analysts are expecting 12-14% growth over the coming 5 years.
If those aren’t the characteristics of a high quality company, I don’t know what is!
Twenty-five years from now, I highly doubt I will care that I slightly overpaid by spending $54.85 for my 15 shares rather than waiting for my “perfect price” that may never come.
On the dividend front the lack of income doesn’t concern me, especially when considering the double-digit growth rate that Nike provides. It also has plenty of room to increase the payout ratio, as it now pays out just 30% of earnings.
My hope is that Nike follows the dividend growth trajectories seen by Home Depot, Starbucks, and Lowe’s. Companies that have all increased dividend rates as they’ve matured, and now sport payout ratios between 35 and 50%.
I have recently made a concerted effort to add more growth to my portfolio. In the last twelve months I’ve opened positions in Becton Dickinson and Company $BDX, CVS Health Corporation $CVS, Lowe’s Companies Inc. $LOW, and now Nike.
They are all companies with 20+ year track records of producing double-digit growth, and I believe have a good chance of continuing that growth going forward. None of them would be considered income stocks now, but I’m confident they will be a big part of funding my retirement when that day comes.