Will Nike Help You Retire Rich?

Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.

The power of a well-known brand name is huge in the retail industry, and with one of the most valuable retail brands in the world, Nike (NYS: NKE) has made its presence felt both in the U.S. and internationally. Yet with up-and-coming niche players trying to make their mark on the industry, can Nike sustain its size advantage? Below, we'll revisit how Nike does on our 10-point scale.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.


Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

  • Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
  • Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
  • Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
  • Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
  • Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at Nike.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$47.7 billion

Pass

Consistency

Revenue growth > 0% in at least four of five past years

4 years

Pass

 

Free cash flow growth > 0% in at least four of past five years

2 years

Fail

Stock stability

Beta < 0.9

0.85

Pass

 

Worst loss in past five years no greater than 20%

(19.4%)

Pass

Valuation

Normalized P/E < 18

26.05

Fail

Dividends

Current yield > 2%

1.6%

Fail

 

5-year dividend growth > 10%

13.8%

Pass

 

Streak of dividend increases >= 10 years

10 years

Pass

 

Payout ratio < 75%

37.8%

Pass

       
 

Total score

 

7 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Nike last year, the company has kept its seven-point score. The stock hasn't done much better than that flat performance, climbing by roughly 5% over the past year.

One of the biggest successes that Nike has enjoyed is its discovery that in a world where retail stores are undergoing a huge transformation, what's important is having brand awareness that can drive sales wherever your goods happen to be. With a combination of its own stores as well as selling its shoes and other merchandise through retail partners, Nike provides multiple showrooms for shoppers either to buy products on the spot or feel more comfortable getting them online.

Still, the competition in athletic goods has been fierce. Under Armour (NYS: UA) has emerged as a credible long-term threat, with its huge growth only beginning as it spreads across the globe and tries to capture a bigger part of Nike's shoe market share. Meanwhile, athletic apparel specialist lululemon athletica (NAS: LULU) has tapped into the high-end yoga niche with a passion, drawing Gap (NYS: GPS) to imitate the company with its Athleta line and arguably showing Nike that it needs to focus more on female shoppers in its efforts to sustain and grow its own revenue.

But Nike has spotted a potential game changer through its FuelBand exercise monitoring device. The product has been so successful that rumors have arisen that Apple (NAS: AAPL) is considering a wristwatch device of its own. With a strong earnings performance in its most recent quarter, Nike appears to be hitting on all cylinders from a business perspective right now.

For retirees and other conservative investors, Nike is a solid stalwart stock, but it trades at a high valuation and doesn't have the dividend yield that many retirement investors prefer to see. Looking for a pullback similar to what the stock saw last summer might be the best way to play the stock going forward.

Keep searching
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills, and teach you how to separate the right stocks from the risky ones.

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The article Will Nike Help You Retire Rich? originally appeared on Fool.com.

Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Apple, lululemon athletica, Nike, and Under Armour. The Motley Fool owns shares of Apple, Nike, and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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