Is Nike the Right Stock to Retire With?

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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.

Whether you've ever played a sport or just watched them on TV, it's almost impossible for you to have ignored the impact that Nike (NYS: NKE) has had on the athletic apparel and footwear industry. The company helped transform sportswear from crude, specialized equipment to something everyone can wear just about anywhere. Yet as the king of the mountain, has Nike gone as far as it can before taking a big fall? Below, we'll look at 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?

SizeMarket cap > $10 billion$45.2 billionPass
ConsistencyRevenue growth > 0% in at least four of five past years4 yearsPass
 Free cash flow growth > 0% in at least four of past five years3 yearsFail
Stock stabilityBeta < 0.90.89Pass
 Worst loss in past five years no greater than 20%(19.4%)Pass
ValuationNormalized P/E < 1825.49Fail
DividendsCurrent yield > 2%1.5%Fail
 5-year dividend growth > 10%14.7%Pass
 Streak of dividend increases >= 10 years10 yearsPass
 Payout ratio < 75%26.2%Pass
    
 Total score 7 out of 10

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

With a score of seven, Nike competes with the best. The footwear specialist doesn't deliver everything that conservative investors like to see in stocks, but a rising dividend and healthy growth presents an attractive combination.

Nike has spent decades building up one of the top 25 brands in the world, with a wide array of promotional endorsements. Lately, that has helped the company expand into growing markets like China, where it faces a major challenge: how to get viewers to start playing sports rather than just watching them.

But the challenge Nike faces in the U.S. could be even larger. In the athletic apparel space, both lululemon athletica (NAS: LULU) and Under Armour (NYS: UA) have hit different niches but nevertheless produced superior gross margins. Lululemon pre-announced strong holiday results that exceeded estimates by a long way, pushing comps in the low- to mid-20s. And as Under Armour tries to branch out into shoes, Nike will have to defend its turf once again.

Moreover, even within footwear, Nike's products aren't the only game in town. Crocs (NAS: CROX) has risen from the ashes to produce strong growth recently, showing that fashionable shoes can trump athletic shoes.

For retirees and other conservative investors, the biggest strike against Nike is its lofty valuation. At 25 times earnings, it's hard to justify paying up for the footwear giant, even with its record of secure income and stock price stability. If you're fortunate enough to get a dip in the stock, however, you should be ready to pounce to add Nike to your retirement portfolio.

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.

Add Nike to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

If you want to retire rich, you need to be confident that you've got the basics of your investment strategy down pat. See if you're on track by following the "13 Steps to Investing Foolishly."

At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Lululemon Athletica and Under Armour. Motley Fool newsletter services have recommended buying shares of Under Armour, Nike, and Lululemon Athletica, as well as creating a diagonal call position in Nike. 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 Fool has a disclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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