It is almost impossible to find a large cap name at a decent price in the stock market these days. That’s because the stock market is now the second most expensive in history. Nike, Inc. (NYSE:NKE) regrettably doesn’t break that mold. Still, does NKE stock make sense for the dividend investor. Is the Nike stock dividend safe?

Let’s take a look at its most recent quarterly results, which are for Q1 of FY18.

Nike stock delivered revenues of $9.1 billion, which was flat compared to the previous year. About 95% of this revenue was generated from the Nike brand itself, and the other 5% from Converse, although Converse revenues were down 16%.

It’s the gross margin numbers that show how tough things are for retail these days, with a 180 bps decline to 43.7%. Part of this was due to lousy currency exchange rates, but management said the rest was due to “a higher mix of off-price sales.” In other words, Nike had to discount to get product out the door.

Nike has an interesting expense category that it lumps in with SG&A, called “demand creation expense.” I like this, because it shows investors how much Nike spent on what I might call “branding” or “sponsorships.” It’s a weird, quasi-flexible expense because brands need to spend money in this category, yet not too much because one hopes the brand speaks for itself.

Nike dropped $855 million on this category which, while down 18% YOY, also demonstrates that Nike felt it didn’t need to spend as much this year as last year, which is good. But it is also difficult because even if we had comparisons we could make across the sector, determining ROI still is a challenge.

Meanwhile, NKE stock continues to transition more and more to online sales, as it cut jobs and pumped about $2 billion into operating overhead.

The net income number was thus affected by all these transitional costs, and so it declined 24% to $950 million. Thus, with TTM net income standing near $4 billion, NKE stock trades at about 21x earnings. More on that in a moment.

As for Nike’s balance sheet, which has generally been stellar throughout its history, it’s still pretty good. Cash on hand is still strong at $5.5 billion. I’m irritated by the fact that Nike drew down debt – now at $3.47 billion – that is really just being used to repurchase stock as part of a 4-year, $12 billion program.   The company has already spent $5.3 billion on this program, repurchasing 95 million shares, meaning the average price has been $55.78.

That’s not a horrible price because it is at least arguably close to fair value, but companies should buy back stock when the stock is undervalued.

The Bottom Line on NKE Stock

So, looking at the Nike stock dividend, operating cash flow fell to $575 million from $788 million YOY, with FCF falling to $305 million down from $511 million.

With a run rate of $1.22 billion, that’s just barely enough to cover the dividend without reaching into the substantial cash pile. But I’m not at all worried about the Nike stock dividend. Not only is the cash pile big enough to pay the Nike stock dividend, but this is a transitional phase for the company. So the Nike stock dividend is safe, but the dividend payout isn’t high enough to buy the stock for just that purpose, because Nike stock price per share is way too high.

Analysts are looking at 8.25% annualized growth going forward. I add the 1.4% Nike stock dividend yield to that number to reach 9.65x as a reasonable price to pay. However, I then add a 10% premium for Nike’s world class brand name and another 10% for its cash position. Still, that doesn’t get Nike’s fair value to even 12x earnings – which is substantially below today’s price.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.