Should Growth Investors “Just Do It” and Buy Nike Stock?

Last month, the World Bank drastically cut its global GDP growth expectations for 2022. The Washington, D.C.-based institution is projecting 2.9% global GDP growth this year. For context, this is just half of the 5.7% global GDP growth posted in 2021 and far lower than the 4.1% estimate it announced for 2022 back in January.

Unsurprisingly, this has contributed to the growth-oriented Nasdaq Composite‘s 24% year-to-date plunge. Shares of the dominant footwear and apparel company Nike (NYSE: NKE) have fared even worse — down 35%. This raises the following question: Could buying Nike stock be a nothing-but-net swish for growth investors at the current share price? Let’s dive into Nike’s fundamentals and valuation to find out.

Nike delivered sales and earnings growth despite setbacks

Nike reported its fiscal 2022 earnings on June 27. Both revenue and diluted earnings per share (EPS) edged higher for the year. 

The company recorded $46.7 billion in total revenue during the fiscal year, which was up 4.9% over the year-ago period. This growth rate trailed its five-year revenue growth rate of 6.3%.

But considering the supply chain challenges Nike faced during the year that had a negative impact on total revenue, this isn’t an indication the company’s fundamentals are deteriorating. According to CFO Matthew Friend, Nike launched its new enterprise resource planning system in China this month and plans to roll it out in North America next fiscal year. This has the company confident it should be able to better adapt to supply chain challenges moving forward.

The biggest positive for Nike that occurred in fiscal 2022 was the 14.4% year-over-year growth in its direct-to-consumer and digital sales channel called Nike Direct. Revenue surged to $18.7 billion, which pushed its share of the company’s Nike brand sales to 42.1%. This more than compensated for the 1% decline in Nike brand revenue to wholesale customers of $25.6 billion for the year.

Growing momentum in its direct-to-consumer and digital sales channel will have two major benefits to the company in the years ahead: higher margins and less reliance on its wholesale customers.

Nike generated $3.75 in diluted EPS during the year, up 5.3%. Along with higher total revenue, the company’s improved operating efficiency helped boost its net margin slightly to 12.9%.

Nike’s flourishing direct-to-consumer and digital sales channel explains why analysts believe the company will produce 13.4% annual earnings growth over the next five years. 

Image source: Getty Images.

Future dividend growth should remain high

Nike is doing well from a fundamentals perspective. This should also translate into strong dividend growth in the years to come.

That’s because the company’s dividend-payout ratio was just over 30% in fiscal 2022. This means Nike has the financial flexibility to plow capital back into its business, pursue acquisitions, repurchase shares, and repay debt. And it also means Nike has a big buffer to keep paying its current dividend in the event of a temporary decline in profitability. That’s why I believe low-double-digit annual dividend growth will persist over the medium term. This more than compensates for the fact that Nike’s 1.1% dividend yield is meaningfully lower than the S&P 500 index’s 1.6% yield. 

The stock isn’t extremely cheap or expensive

Nike appears to be fully priced at its current $108 per share. This is supported by a trailing-12-month (TTM) price-to-earnings (P/E) ratio of 28.8. For context, this is a bit higher than the company’s 10-year median TTM P/E ratio of 28.1. But the growing impact of Nike’s direct-to-consumer and digital sales channel on its sales arguably justifies a slightly higher valuation multiple than it has generally commanded in the past. This is why buying the dip in Nike stock looks like it could be a smart move for growth investors over the long run.

Kody Kester has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nike. The Motley Fool has a disclosure policy.

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