Dividend yield is the preferred metric for choosing dividend stocks. However, the equation has two moving parts. While dividend yields should preferably increase when companies increase dividends (or the numerator), very often the opposite is true: yields increase when stocks fall and reduce the denominator of the equation.
Nike (NKE) is an example of this. Shares of the sneaker giant are trading at their lowest level in 11 years, pushing its dividend yield to an all-time high of more than 3.7%. The company currently pays a quarterly dividend of 41 cents, which increased 2.5% last year. It has a tremendous track record on dividends and has increased them for 24 consecutive years. Repeating the feat one more year will make Nike a Dividend Aristocrat.
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Meanwhile, the dividend yield doesn’t hide the huge erosion of capital, with NKE stock having lost two-thirds of its market cap over the past three years. Is NKE stock a buy for its dividend or would investors be better off staying away from the troubled company? Let’s explore, starting with the company’s dividend.
Companies with high dividend yields often struggle, so it’s prudent to examine the sustainability of payments. In the case of Nike, its payout ratio has exceeded 100%, which basically means that its dividends are greater than its earnings. More concerning is that, in the fiscal third quarter of 2026, which ended in February, its dividend payments exceeded its operating free cash flow. The company’s cash reserve eroded by a whopping $2.3 billion in the quarter as, aside from dividends, it spent on capital expenditures, bond repayments and share buybacks.
Looking at the latest numbers, Nike’s dividends would seem unsustainable. However, the company’s profitability and margins should improve in the coming quarters. Consensus estimates call for a 21.4% increase in earnings per share (EPS) for the current quarter, which is the final quarter of Nike’s fiscal year. For the next fiscal year, analysts predict an increase of 36.4%.
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These are estimates, of course, and are subject to revision as things evolve. However, I agree with Nike and the analyst community that the worst is almost over for the company, at least in terms of profitability.
Given the expected increase in profitability, Nike’s dividend appears sustainable. Additionally, cutting dividends would be a fairly drastic measure, and while it helps conserve cash, the markets may not take kindly to that decision. In summary, Nike’s dividend seems sustainable to me unless the company’s earnings decline continues for an extended period, which is a fairly low probability.
However, dividends are often a side story or, in the case of Nike, let’s say a supporting cast. The real bet is Nike’s recovery, which is taking a long time. As CEO, Elliott Hill reportedly told employees at a recent meeting, “I’m very tired, and I know you are too, of talking about fixing this business.”
Nike’s problems are multiple, as the company has not fully evolved to meet the needs and aspirations of customers. In an era where celebrity and influencer brands are becoming popular and newer brands are riding the social media wave to gain traction, Nike has declined in innovation, something the company itself admitted. as a partner bar diagram Analyst Jim Osman rightly wrote that Nike’s problem is “relevance.” The brand is also not as strong as the company perceived and it had to rebuild relationships with third-party sellers and wholesalers after previously abandoning them for direct sales.
Meanwhile, even as Nike is going through a crisis, it still doesn’t look like a company in terminal decline. After Nike’s fiscal third-quarter earnings release, I noted that the stock needs to fall further to look attractive. NKE stock has plummeted sharply after that earnings report, and the market cap is now about $65 billion.
Nike trades at a forward price-to-earnings (P/E) multiple of 29.4 times, which wouldn’t look too cheap. However, analysts expect it to post EPS of $2.57 in FY2028, giving us a FY28 P/E of just over 17x. However, as stated above, these are just estimates, and Nike remains a “show me” story that has to deliver on the change.
Overall, I think that after the sharp drop, Nike’s risk-reward is much more balanced now, even if it is still not a compelling buy, given the adverse macroeconomic environment.
On the date of publication, Mohit Oberoi had no (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article are for informational purposes only. This article was originally published on Barchart.com
