While the broader U.S. markets are hitting record highs almost every other day, some stocks are still languishing near their 52-week lows. When those stocks happen to be strong global brands like Nike (NKE) and Starbucks (SBUX), it only seems to hurt investors all the more.
Nike and Starbucks are both trading near multi-year lows, and have been long-term underperformers. To be sure, some of the issues that both companies face are similar. For instance, both SBUX and NKE are battling a structural slowdown in China, and are struggling to grow sales in the core U.S. market. Also, while they're still strong brands, both are facing intense competition from newer brands.
Both Nike and Starbucks Have Crashed
Both Nike and Starbucks crashed after their most recent earnings reports, as they not only missed quarterly revenue estimates, but also slashed their revenue guidance.
Amid the perennial underperformance in their share prices, Starbucks and Nike offer strong dividend yields of 3.1% and 2.1%, respectively, which is higher than what an average S&P 500 Index ($SPX) constituent pays. Also, based on their mean target prices, they bring upside potential of over 20% each to the table.
Should you buy these two stocks for their high dividend yield and strong upside potential? We’ll discuss in this article.
Nike’s Dividend Yield Tops 2% Following the Crash
Nike describes itself as a “growth company,” so investors don’t exactly expect it to be a high-yielding dividend stock. The company’s dividend yield has historically been in the ballpark of 1%, and the only time in this century that its dividend yield previously rose above 2% was during the 2009 stock market crash.
Even now, the rise in yield is not because Nike's board has suddenly turned generous; it's because the stock has fallen by more than half, which has led to an increase in its dividend yield.
Amid the crash, Nike stock has almost fallen to its March 2020 lows, when global markets tanked amid the initial outbreak of the COVID-19 pandemic.
NKE Stock Forecast
After Nike’s disappointing earnings last month – after which it lost nearly 20%, and shed a record $28 billion of its market cap – several brokerages lowered the stock’s target price. Of the 29 analysts covering NKE stock, 14 rate it as a “Strong Buy” and 1 as a “Moderate Buy.” Thirteen analysts rate Nike as a “Hold,” and 1 as a “Strong Sell.”
Nike’s mean target price is $93.07, which is nearly 28% higher than Tuesday's closing prices. Nike’s next 12-month (NTM) price-to-earnings (PE) multiple of 22.5x is even below the COVID-19 lows, which could suggest the stock is cheap.
However, with the company forecasting a “mid-single digits” decline in sales this fiscal year – which was preceded by the last several quarters of dismal growth – markets have derated the sneaker giant.
Nike has to get its act together and come up with products that can take on more modern competitors. Unless the company shows visible signs of improvement in its top line, it might struggle to win over investors.
Starbucks Has a 3% Dividend Yield
Starbucks has a dividend yield of 3.1% which is over twice that of the S&P 500 Index. The management has an intense focus on its dividend, and targets a payout ratio of 50%.
Notably, dividends feature prominently during Starbucks’ earnings calls. During the fiscal Q2 2024 earnings call, the company said that its commitment to shareholders is reflected in its “best-in-class dividends.”
Starbucks' current dividend yield is also the highest since the company started paying dividends in 2010.
SBUX Stock Forecast
Of the 26 analysts covering Starbucks, 11 rate it as a “Strong Buy” and 1 as a “Moderate Buy.” The remaining 14 rate SBUX as a “Hold” or some equivalent. The stock carries a mean target price of $92.76, which is 22.8% higher than Tuesday’s closing prices.
It trades at an NTM PE multiple of 19.4x which is similar to its March 2020 lows. While Starbucks faces some serious headwinds in the near to medium term, it is still among the most iconic consumer-facing brands. Like Nike, it is also trading at a massive discount to its long-term multiples, and the question investors need to ask is - are things that bad? I would say perhaps not.
Overall, the ball is in the respective courts of Nike and Starbucks, and they need to convince markets that they are still strong brands that can compete with established rivals, as well as newer competitors.
On the date of publication, Mohit Oberoi had a position in: NKE . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
