Key Points
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Investors will need over 6,000 shares to earn $10,000 in dividend income.
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Nike may not be the safest dividend stock right now, as it needs to execute a turnaround.
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Over the last year, Nike paid out more in dividends than it generated in free cash flow.
- 10 stocks we like better than Nike ›
It will take roughly 6,090 shares to earn $10,000 a year in dividends from Nike (NYSE: NKE). This is based on its current quarterly payment of $0.41, or a forward-12-month dividend of $1.64 per share.
Nike’s dividend yield is the highest in its history. The company recently raised the quarterly payment by 3%, marking 24 consecutive years of dividend increases.
But the high yield doesn’t come without risks. The stock has fallen 76% from its previous peak due to weaker consumer spending and lower revenue growth.
The weaker revenue isn’t the biggest problem for Nike — it’s lower margins. To support continued dividend payments, the company has to pay out more cash than it is taking in. Over the last year, Nike paid out roughly $2.4 billion in dividends but generated just over $1 billion in free cash flow. That’s obviously not sustainable in the long run.
Free cash flow is down partly due to restructuring costs related to turnaround efforts and investment in stores and products. These are largely transitional, so Nike should be able to recover its free cash flow fairly quickly. I wouldn’t be too alarmed about the high payout ratio right now.
Nike also has approximately $9 billion in cash and short-term investments on its balance sheet, with $7.9 billion in total debt. More cash than debt is solid, but investors will need to closely follow quarterly earnings reports. Nike needs to show progress in improving margins and boosting free cash flow to cover the dividend payments.
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John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nike. The Motley Fool has a disclosure policy.
