Sportswear champion Nike (NKE) saw its stock leap 5% on Friday after announcing a slew of shareholder-friendly moves. NKE will be launching a $12 billion stock repurchase program, hiking its dividend by 14%, and doing a 2-for-1 stock split.
Let’s take a look at each of these moves and ponder what they might mean for Nike stock.
Nike Stock Buyback
We’ll start with the buyback plan.
The new $12 billion buyback only goes into effect once it finishes using its existing $8 billion plan. For a stock with a $112 billion market cap, this is a major commitment for Nike. The new program alone accounts for fully 11% of the shares outstanding at current prices.
Share buybacks are very much a mixed bag. If done right, at attractive prices, they add a massive amount of shareholder value. The remaining shareholders are left with a bigger piece of the profits.
But notice I said “when done right.” When done poorly, at high prices or with borrowed money, repurchases actually destroy shareholder value.
So, how does the Nike stock buyback stack up?
I’d say it’s decent. Nike stock is a little on the expensive side, trading at 33 times trailing earnings and 27 times next year’s expected earnings. But Nike also has minimal debt and over $5 billion in cash sitting on hand. So while I’m not crazy about the prices NKE is paying, at least they’re not going to take on excessive debt in order to do it.
Increasing Dividends? Just Do It
Now, let’s talk about the Nike dividend.
Nike is really not much of a “dividend stock,” per se. It yields less than 1% at current prices. But NKE definitely deserves credit as an aggressive dividend raiser. Over the past 10 years, the Nike dividend has risen at a solid 15% clip.
The reason the yield is so low is that Nike stock has risen at such a blistering pace, stock price appreciation is running faster than dividend growth.
Nike stock has risen by a factor of five from its 2009 lows. That’s pretty remarkable for a company that has been publicly traded for decades.
And the NKE Stock Split?
I’m not the biggest fan of stock splits, personally. For the most part, they are a distraction that adds no real value. Once a stock price gets to be $500 to $1,000, you can credibly say that it gets harder to trade for smaller investors. But Nike stock, trading a little north of $130, is nowhere near those levels.
The Nike stock split shouldn’t’ destroy value, mind you. But I don’t see it adding much either. Call this one a wash.
So, one balance, Nike’s moves are a clear net benefit for its investors. But at current prices, is Nike stock a buy?
Maybe, though be careful here. The U.S. market has been kept afloat this year by a handful of very expensive, high-momentum growth stocks, mostly in technology (see “Growth Beating the Pants off of Value in 2015”). With growth prospects in most industries pretty dim, investors have been piling into the few remaining stocks still showing some life.
While Nike stock is obviously not in the tech sector, Nike is one of that handful tugging the market higher. But with the market getting narrower and narrower, something eventually has to give. Either the momentum names finally roll over too, dragging the entire market lower, or the beaten-down value sectors need to start showing leadership.
Neither scenario looks particularly good for Nike stock.
So, here is my advice. If you’re a short-term momentum trader, stick with NKE a bit longer. I expect the company to have solid Christmas sales and an overall good fourth quarter. But be prepared to sell should Nike stock start to finally lose momentum.
At current prices, this is a trade, not a long-term investment.
Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.
