Is a Dividend Cut Inevitable for Nike?

Dividend payments are never a guarantee. If a company is doing well and its stock is rising, there usually won't be any significant questions about whether its dividend is safe and sustainable. But once a company runs into trouble, all that can change.

Nike (NYSE: NKE) has been facing plenty of adversity in recent years. The apparel company has been struggling to grow sales, margins have been declining, and the business is in the midst of a turnaround, trying to fix things before the stock falls even further. In five years, it has already lost more than 60% of its value.

This also begs the question of whether its dividend is still safe. At 3.6%, it's now more than three times the average S&P 500 yield of 1.1%. And while that payout might give investors an incentive to hang on and wait, can it truly be relied upon, or is a dividend cut inevitable?

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Can Nike's financials support its dividend?

One way to assess the health of a company's dividend is to look at its bottom line. Is it generating enough profit to cover its dividend payment? It's always a good idea to look at the most recent financials to get a better, more up-to-date picture of how the business is doing.

In its most recent quarter, which ended on Feb. 28, Nike's net income crashed by 35%, to $520 million. Its earnings per share came in at just $0.35. That's well below the $0.41 quarterly dividend the company announced in February, and puts its payout ratio at 117%. That's assuming that the company's profitability remains fairly similar in future quarters.

Another problem: in each of the past four quarters, the cash dividends it has paid have been higher than its free cash flow.

I wouldn't count on Nike's dividend remaining intact for the long haul

Nike has been a solid dividend stock to own for decades. But given the situation it finds itself in, I wouldn't be surprised if it were to slash its payout in the future. While it did raise its dividend last year, whether that will continue will likely depend on how management feels its turnaround strategy is going, and whether it needs the cash to fund its growth strategy.

Unfortunately, dividend cuts or suspensions can come suddenly. Some companies may hold out for a long time before making a move, while others might be aggressive and do so as soon as there are signs of trouble. Either way, with so many issues plaguing Nike right now and so much uncertainty around the business, I wouldn't rush to buy the stock today, as not only could its share price go lower, but the dividend also doesn't look terribly safe these days.

David Jagielski, CPA 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.