In the United States, you would have to go back to 2005 to find the last year in which more golf courses opened than closed. And since 2011, the United States has been riding an ominous streak in which 150 or more golf courses per year closed than opened. Other data sends similar signals: Adidas is generating half as much revenue from the sale of golf clubs as it did in 2013. Dick’s Sporting Goods, after spending $200 million to acquire Golf Galaxy in 2006, made its mark soon after by hiring a PGA golf pro to staff its 522 locations. Then, it laid off all of them shortly thereafter despite lofty initial promises (those fired golf pros probably viewed their boss as living up to its name). The demographic of 18 year olds to 32 year olds now golfs at only half the rate of the same demographic back in 1999.
Reflecting on these conditions, Nike announced last Wednesday that it will no longer make golf clubs, balls, or bags but will continue to make Nike-branded golf shoes and shirts. The latter are lucrative because they are highly profitable with nearly 40% margins and also have cross-over appeal beyond as many non-golfers nevertheless wear Nike golf shirts.
But you know what caught my attention? The fact that golf products, as an overall share of Nike’s revenue, declined from nearly 20% in 1995 to only 3% today.
Nike, which began as a track shoe company, has expanded its apparel and equipment operations to include: football, running, basketball, tennis, golf, baseball, cycling, volleyball, wrestling, water sports, auto racing, cross training, and even general wear. This is a high degree of diversification–it is the dominant player in its niche much like Disney’s role in the media entertainment industry or Tiffany’s role among speciality retailers–in that it sells all sorts of products that appeal to different markets and generate obscene profit margins. And these obscene profit margins have remained the case ever since Nike’s IPO in 1980.
If you are looking for an ideal cornerstone stock for a retirement portfolio, then Nike is a strong candidate because: (1) it sells products generally immune from technology change; (2) it is highly profitable at all stages in the business cycle; and (3) it operates a diversified business model so that when one line becomes unfashionable the profits pouring in from the other segments can more than offset it.
There aren’t many times when I disagree with the prevailing wisdom of other income authors in the internet. But the trend towards minimum yields, also known as only buying stocks yielding at least 2.5% or 3%, is one of the dumbest trends to emerge in recent years. A whole lot of people who have recognized the superiority of Nike’s long-term business model have declined to purchase shares for ideological reasons because the stock’s starting yield is only 1%. That’s a self-inflicted unforced error that results in a lot of foregone wealth.
Even though the 1% dividend yield at Nike is lower than a lot of people would like, the trade-off is worth it. First of all, you get a company with earnings quality equal to the top caliber firms in the world like Johnson & Johnson or Colgate-Palmolive. But secondly, you get a strong growth kick. A lot of times, retirement investing involves lowering your ceiling of investment returns in exchange for raising the ground floor of what a worst-case scenario looks. Nike gives you that best of the world downside protection from a business operating standpoint without cutting off your maximum potential. It is nice to own something as your approach retirement that compounds at 15% annually for a decade while not exposing your portfolio to added risk. That virtue is well worth a low starting dividend yield of 1% in my opinion.
Originally posted 2016-08-07 21:15:06.