Nike's Earnings Are a Disaster. Run -- Don't Walk -- Away From This Stock.
Key Points
Nike posted a revenue decline in fiscal Q1 2027, and told investors that its top-line shrinkage will accelerate throughout the fiscal year.
Sales in China tumbled by 26%, and even growth in developing regions has stalled.
Nike had a 85.7% dividend payout ratio in the quarter, and that ratio could get closer to 90% by the end of its fiscal year if sales and profits continue to drop.
Nike (NYSE: NKE) was once viewed as a blue chip dividend stock, but it's a tremendous case study on how relatively "safe" stocks can become riskier than growth stocks. The stock has fallen roughly 80% over the past five years, and its latest earnings report didn't paint a pleasant picture for the future.
Declining revenue, a weakening presence in China, and a narrow margin for the dividend were some of the concerns that came out of Nike's fiscal 2027 first quarter. Here's what investors should know.
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The growth story is nonexistent
The main headline figure was a 4% year-over-year revenue decline, but this may end up being the best quarter of Nike's fiscal 2027. Guidance for the full year implies a year-over-year revenue decline in the high single-digit percentages.
There truly was no bright spot in Nike's report, especially when mapping out its sales results across its various regions. In North America, the company's largest segment, revenue was only up by 2%. Revenue from China, once viewed as a compelling growth opportunity, sank by 26%.
Revenue also declined in the Asia Pacific & Latin America market. That's a major detail since many corporations look to countries in those regions to bolster growth after their North American markets mature. The fact that even these parts of the world didn't produce high growth rates for Nike means that there are no currently promising markets where it can expand in a way that would compensate for its lackluster performances in North America and Europe.
The dividend may be at stake
The stock's multiyear slump has resulted in a dividend yield approaching 5% -- a level that would have been unthinkable just a few years ago. Management has hiked the dividend for 24 consecutive years. However, the forecast for more revenue declines in fiscal 2027 could put the payout in danger, especially if sales continue to slide in subsequent years.
The dividend isn't in danger right now thanks to Nike's $8.4 billion cash position. However, Nike reported $712 million in net income during its fiscal 2027 first quarter. It also distributed $610 million to shareholders through dividends that quarter and did not initiate stock buybacks. So for the quarter, Nike had an 85.7% dividend payout ratio, which is dangerously high.
Nike is resorting to layoffs to cut costs, which doesn't imply the reemergence of a growth narrative. Furthermore, with Nike allocating most of its net income toward shareholders, it doesn't have much capital left to reinvest into the business.
Revenue declines are projected to get worse, and if net income also drops, the dividend payout ratio can get very close to 90% by the end of Nike's fiscal 2027. That would raise further concerns about the dividend's sustainability at current levels. If Nike announces a dividend cut by the end of the decade, which seems very possible, investors will rush for the exits.
Marc Guberti 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.