November 4, 2012 in Business

Motley Fool: Nike stock has earned consideration

Universal Uclick
 
Associated Press photo

A man walks past the Nike logo at the company’s factory store in San Diego.
(Full-size photo)

It’s hard to ignore the impact that Nike (NYSE: NKE) has had on the athletic apparel and footwear industry.

Nike has spent decades building one of the top 25 brands in the world. Lately, that has helped the company expand into growing markets such as 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 and Under Armour have hit different niches and have been performing well. With Under Armour now expanding into shoes, Nike will have to defend its turf once again.

The stock’s dividend yield, recently 1.5 percent, isn’t massive, but the company has raised it by an annual average of more than 14 percent over the past five years.

For retirees and other conservative investors, the biggest strike against Nike is its lofty valuation. With a price-to-earnings (P/E) ratio above 20, it’s hard to justify paying up for the footwear giant, even with its record of secure income and stock price stability. Upon a price dip, though, consider pouncing and adding Nike to your retirement portfolio.

(The Motley Fool owns shares of lululemon athletica, and its newsletters have recommended buying shares of it, Under Armour and Nike.)

Ask the Fool

Q: What are REITs? – R.B., Columbus, Ind.

A: Real estate investment trusts (REITs) are popular with many investors as they let you invest in real estate without actually buying any property. Like mutual funds in some ways, they’re professionally managed organizations that pool the capital of many people in order to acquire or finance properties like offices, hotels, apartments, shopping centers and medical centers. Their portfolios are diversified and generally produce income. Many REITs trade publicly on major stock exchanges.

Corporations or trusts that qualify as REITs typically don’t pay corporate income tax and are often exempt from state income tax as well. They must invest most of their assets in real estate and pay out at least 90 percent of their taxable income as dividends. In good years, REIT dividends can run quite high, sometimes topping 10 percent. Learn more at nareit.com.

Q: If someone invested $1 in the stock market after the crash of 1929, how much would it be worth today? – F.R., Brooklyn, N.Y.

A: First of all, understand that the crash of 1929 really occurred over several months, not just one day. The Dow Jones industrial average (the Dow) peaked in early September 1929, at 381. It then slid down to 199 in mid-November, before rising again to 294 five months later, in 1930. (In October 1929, it slid more than 11 percentage points on two successive days.) From there it began a long descent, falling to 41 in July 1932.

With the Dow recently around 13,600, it’s up some 332-fold since the low of 41. That’s enough to turn your $1 into $332. Not too shabby, eh? That’s an annual average growth rate of about 7.5 percent.

My smartest investment

I disagree with those who discourage investments in initial public offerings (IPOs). I invested $5,000 in Capitol Federal Financial’s IPO in April 1999, and within a few years, I had received $1,000 in dividends and the stock had more than doubled. – H.G., Overland Park, Kan.

The Fool responds: Not all IPOs are equal. The most risky for investors are those tied to unproven companies without established growth and profitability track records, and those that are the subject of much hype in the market. Hype can lead the company to hike its opening price, thereby decreasing ultimate returns. Founded in 1893, Capitol Federal was not a young, unproven, much-hyped company. Various studies have shown that in general, IPOs tend to be market-lagging investments in their first few years. Even with Capitol Federal, you could have bought in at about the same price a year later.


Thoughts and opinions on this story? Click here to comment >>

Get stories like this in a free daily email