Nike enjoys a great deal of ubiquity, which translates into brand name recognition essential in differentiating products. Interbrand ranks Nike at No. 17 on its 2015 list of global brands. Ubiquity also provides market dominance and negotiating power, enabling the company to lower costs. Presence and size enhance brand identity. A wide array of athletes, marketing channels, huge global footprint and demographics also contribute to Nike’s overall persona.
Nike is a big believer in not only taking care of its stakeholders but utilizing them to its benefit. Athletes give the company insights on product design. Realizing the need to constantly stay ahead of the competitive curve compels Nike to stay in touch with the final consumer and representatives of the sports and fitness community. If there is a way to make the lives of consumers easier by allowing them to function better in sports and fitness Nike will surely find a way to do it.
Rock solid fundamentals
The biggest reason to invest in Nike is that its management is a big believer in conservative financial management. Rightly, they believe that good financial management leads to innovation, which translates into even greater revenue, net income and free cash flow resulting in superior shareholder return. This represents a financial “virtuous cycle”.
Over the past five years, Nike expanded its revenue, net income and free cash flow at a respectable 10%, 11% and 6%, per annum, respectively. Moreover, Nike sits on an excellent balance sheet with a cash to equity ratio of 42% in the most recent quarter. Its long-term debt comes in at 17% of stockholder’s equity, which is extraordinarily low in my book. Personally, I like to see companies with long-term debt amounting to 50% or less of stockholder’s equity. So far this year, Nike’s operating income exceeds interest expense by an incredible 255 times. The rule of thumb for safety lies at five times or more.
Nike exercises prudence in paying out its dividends. Last year, the company only paid out 24% of its free cash flow, which leaves plenty for innovation. I like to see companies pay out 50% or less of their annual free cash flow in dividends. Right now, Nike pays it shareholders $0.64 per share per year and yields 1.2%.
Nike definitely deserves a spot in your long-term portfolio. Nike’s brand identity, ubiquity and conservative financial approach make this company a force to be reckoned with among its many competitors. Nike currently trades at a P/E ratio of 25 vs 24 for the S&P 500 making this company slightly overvalued by this metric. Investors may want to take a small position while adding more during market corrections.
William Bias (stockdissector) owns shares in Nike. He is not a financial adviser. Always seek a second opinion and do your own research. Copyright William Bias 2016