I have been a big backer of Starbucks Corporation (NASDAQ:SBUX) for a number of years. The company’s strong leadership, impressive growth and iconic brand were all attractive. The dividend was another motive. Management’s focus has led to years of double-digit growth. That’s why I’m kicking myself for missing one very similar stock: Nike Inc (NYSE:NKE).
SBUX stock and NKE stock have essentially mirrored each other over the past five years. I have worn the dunce cap more than once trying to pick growth stocks, value stocks and special-situation plays.
But the one area I’ve excelled in? Picking Future Blue Chip stocks.
I may have passed on NKE stock over the years, but that is no longer the case. Thankfully, the stock has been under pressure. Long-term investors focused on the business and dividend now have time to buy. Long pauses and notable pullbacks are welcomed in high-quality stocks.
Is Nike stock high-quality? You bet.
The Positives for NKE Stock
One could argue that a price-to-earnings ratio of 25.5 is still a bit expensive. But one could also point out that this is near the low-end of Nike’s five-year range, as shown below:
Valuation is a consideration for me, but it is not the most important factor in the game. I care about the long-term business. I care that there’s a long runway to its success and that when the growth does eventually slow, that there will be a continual flow of income, both for the business and into my pockets.
On that note, Nike stock yields just 1.3%. But, its dividend has been growing by double-digits for basically the past 10 years. I say basically because Nike “only” raised its dividend by 9.7% in 2009. It’s noteworthy that NKE not only continued to pay a dividend through the financial crisis, but also continued raising said payout.
While Nike’s dividend growth has been slowing over the past few years, the hope is that it will continue at a double-digit pace. A big part of selecting Future Blue Chip stocks is the company’s focus on dividend growth. Combined with reasonable sales and earnings growth, the dividend acts as the third catalyst in a 1-2-3 punch.
The Negatives for NKE Stock
That said, what if Nike cannot grow at its predicted pace? Then it would certainly will be viewed as overvalued down the stretch.
For a look at what happens when sales and earnings slow more than expected, look no further than Under Armour Inc (NYSE:UA) (NYSE:UAA). Despite being a high-quality sports apparel manufacturer, UAA stock has been decimated.
Nike’s high single-digit sales growth expected for this year and next year is good, but not necessarily great. It makes me wonder if the company’s original goal of $50 billion in revenue in 2020 is indeed achievable, especially with increased competition from Adidas AG (ADR) (OTCMKTS:ADDYY) and UA. According to E*Trade, analysts currently expect NKE to generate $46.3 billion in sales in 2020.
Additionally, Nike has missed on sales expectations in three of the past five quarters and on four of the past eight. Notably though, it has beat EPS estimates for at least 12 straight quarters.
One additional concern is Trump’s stance on imports. Apparel companies are notorious for producing overseas at low rates and importing those products into the U.S. to distribute. If a border tax hits NKE stock, it’s not clear how it could impact the business, but it’s unlikely to be a positive.
The Bottom Line for Nike
I don’t expect the president to push for import tariffs that will wildly punish Nike stock overnight. While it’s possible, we also have to consider the benefit NKE should receive from lower taxes (although its effective tax rate in fiscal 2016 was only 18.7%).
Nike may ultimately fall a bit short of its lofty goals. But it’s unlikely the king of athletic apparel will give up the throne any time soon. UA’s products are good, but the two companies can co-exist in today’s world. Plus, it’s hard to picture Nike falling into second place.
Given Nike’s double-digit earnings and dividend growth, I think this is a noteworthy long-term stock for investors who have time and patience to see it continually grow into a better and better investment.
With any luck, a pullback will knock NKE stock back down, giving investors a better buying opportunity.
As of this writing, Bret Kenwell held a long position in SBUX and NKE.