Nike (NKE) may not offer the most impressive dividend yield, but it more than makes up for it, with high dividend growth. Nike has a current dividend yield of 1.2%, but if investors are patient, they can earn a high dividend yield with time. That is because Nike has increased its dividend for 15 years in a row. It is a Dividend Achiever, a group of stocks with 10+ years of consecutive dividend growth. You can see the entire list of all 264 Dividend Achievers by clicking here. Over the past 10 years, Nike has increased its dividend by approximately 15% per year, on average. At this rate, Nike’s dividend would effectively double every five years.

Nike’s high dividend growth is due to its strong earnings growth. The result is Nike generates significant shareholder wealth with a rising share price, in addition to dividend growth. This article will review Nike’s recent quarterly earnings report, which sent the stock up 10%, and why it remains a highly attractive dividend growth stock.

Business Overview

Nike is a global footwear and athletic apparel giant. It operates two segments:

• NIKE Brand (93% of fiscal 2017 revenue)
• Converse (7% of fiscal 2017 revenue)

Footwear makes up approximately 64% of the company’s revenue, with the remainder comprised of apparel and equipment.

On June 29th, Nike released financial results for fourth quarter and fiscal 2017. The results were very strong, as Nike surpassed analyst expectations on both the top and bottom lines. Revenue for the fourth quarter came in at $8.68 billion, which was approximately $50 million above forecasts. Earnings-per-share for the quarter were $0.60, while analysts were expecting $0.50.

On a year-over-year basis, Nike grew revenue and earnings-per-share by 7% and 22%, respectively. Earnings growth benefited from higher sales, as well as cost cuts and share repurchases. For the full fiscal year, Nike grew revenue by 6%, and earnings-per-share by 16%.

Nike is in very strong financial position. It has $6.2 billion in cash and short-term investments on its balance sheet, compared with just $3.5 billion in long-term debt. Nike’s impressive financial condition provides the company with the resources necessary to invest in new growth opportunities.

Growth Prospects

Nike has two compelling growth catalysts moving forward: growth in new geographic markets, and e-commerce. First, Nike is growing rapidly in the emerging markets. These are a collection of nations with expanding middle classes, and high rates of economic growth. For example, in fiscal 2017 Nike’s revenue in China increased 17% excluding the impact of currency exchange. Total emerging-market revenue increased 14% for the year.

Plus, along with its fourth-quarter earnings results, Nike announced it had struck a partnership agreement with Internet retail giant Amazon.com (AMZN). Nike management confirmed that it will begin selling a limited assortment of footwear, apparel, and accessories on Amazon. There is very good reason for investors to be excited about this new partnership. Nike has seen great success with its own e-commerce platform. Direct-to-consumer sales rose 18% in fiscal 2017, to $9.1 billion, driven by 30% growth in digital sales. Opening up Nike’s product portfolio to Amazon’s shopper base should grease the wheels for even stronger e-commerce growth moving forward. Combined, these catalysts could easily propel Nike to double-digit annual revenue growth.

Competitive Advantages & Recession Performance

A big reason why Nike has such high profit margins, and attractive growth potential, is because of its strong brand. According to Forbes,  Nike is the 16th most valuable brand in the world. According to the report, the Nike brand is worth approximately $29.6 billion, up 6% from last year. Nike has an iron-clad grip on athletic shoes. Competitors such as Under Armour (UA) have, so far, been unable to take market share from Nike in footwear.

Its brand strength is a major competitive advantage, and gives Nike the ability to sponsor the world’s most famous athletes, especially in basketball. The Nike Jordan and Nike Lebron product lines have provided billions in sales to Nike over the years. Consider the long-lasting impact of these partnerships.

Even though it has been 20 years since Michael Jordan won an NBA championship, the Jordan Brand generated $3.1 billion of sales for Nike last fiscal year, up 13% from the previous year. In turn, Nike’s deep pockets allow the company to spend approximately $3.3 billion per year on advertising, which helps sustain brand positioning. These qualities make Nike a surprisingly recession-resistant company. On the surface, one might assume Nike is highly sensitive to fluctuations in the economy, since it sells a premium-priced discretionary product.

However, Nike held up very well during the 2008-2009 Great Recession:

• 2007 earnings-per-share of $0.72
• 2008 earnings-per-share of $0.86
• 2009 earnings-per-share of $0.88
• 2010 earnings-per-share of $0.97

Nike increased earnings-per-share in each year of the recession. With its competitive advantages and consistent earnings growth regardless of broader economic conditions, Nike stock is awarded a premium valuation.

Valuation & Expected Total Returns

Nike stock trades at a price-to-earnings ratio of approximately 24.5. It has a slightly discounted valuation when compared with the broader S&P 500 Index, which has a price-to-earnings ratio of 25.7. It could be argued that Nike deserves a higher valuation than the stock market average, due to its strong brand and excellent earnings growth. A higher price-to-earnings ratio would significantly add to Nike’s returns, which will also consist of earnings growth and dividends. Nike could reasonably generate the following returns moving forward:

• 8%-10% revenue growth
• 2%-3% share repurchases
• 1% dividend yield

Based on these assumptions, Nike stock would generate annualized returns of 11%-14% per year moving forward. Share repurchases are a major piece of Nike’s capital returns. Nike is in the process of a $12 billion share repurchase program, which was approved in November 2015. At the end of the last fiscal quarter, Nike had approximately $7.6 billion remaining on its buyback authorization.

Final Thoughts

There is an old saying in the stock market, that premium companies command premium valuations. Nike seems to be a perfect example of this. While Nike is not the cheapest stock around, nor does it have a huge dividend yield, it is a very strong company with an excellent brand. Nike is a hybrid stock, offering a mix of dividends and growth. The stock could still see expansion of its price-to-earnings multiple. And, it should continue to create substantial value for shareholders, due to its sales and earnings growth. This makes Nike a very attractive stock for dividend growth investors.