The S&P 500 Index’s ($SPX) dividend yield has plummeted to levels last seen during the late 1990s, prompting comparisons between the dot-com bubble and the feared artificial intelligence (AI) bubble. Meanwhile, the dividend yield of the world’s most popular index has fallen because dividends haven’t kept pace with the rapid rise in stock prices. However, we see the opposite in many stocks, whose dividend yields have actually spiked this year. For instance, sneaker giant Nike (NKE) currently boasts a dividend yield of 2.4%, which is comfortably twice what its average S&P 500 Index peer pays.
To be sure, Nike was never known for its dividends for good reasons. The company characterizes itself as a “growth company,” and investors don’t really expect such companies even to match the S&P 500 Index constituent’s dividend yield, let alone beat it.
However, while Nike has gradually raised its dividends—it is actually quite close to becoming a Dividend Aristocrat—its stock has sagged. Nike stock peaked in late 2021 and currently trades at just over a third of those levels after having closed in the red for three consecutive years. This year looks no different, and NKE is on track to close in the red for yet another year unless it comes up with a really impressive set of numbers later this week or we see a Santa Claus rally in broader markets.
While Nike currently pays a healthy dividend, its price action has been frustrating. I was bullish on the stock heading into 2025, as I found it cheap based on its long-term earnings potential. The multiples based on near-term earnings have been elevated for the last few quarters as Nike’s earnings have fallen. Along with the slowdown, Nike’s turnaround actions under CEO Elliot Hill’s “Win Now” plan have taken a toll on Nike’s earnings.
As part of the turnaround, Nike has doubled down on innovation, tweaked its market strategy by cozying up with third-party sellers, and cut costs structurally. The company rejigged its C-suite earlier this month to eliminate management layers. While many of the turnaround actions have meant near-term pressure on profitability, they should help drive long-term growth while helping improve the margins.
#Buy