Nike Inc. (NKE)

Dividend Discount Model (DDM)

Difficulty level: Medium

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Dividends are the cleanest and most straightforward measure of cash flow because these are clearly cash flows that go directly to the investor.

Intrinsic Stock Value (Valuation Summery)

Nike Inc., dividends per share (DPS) forecast

USD \$

Year Value DPSt or Terminal value (TVt) Calculation Present value at 13.56%
0 DPS01 0.93
1 DPS1 1.07 = 0.93 × (1 + 15.22%) 0.94
2 DPS2 1.23 = 1.07 × (1 + 14.53%) 0.95
3 DPS3 1.40 = 1.23 × (1 + 13.84%) 0.95
4 DPS4 1.58 = 1.40 × (1 + 13.15%) 0.95
5 DPS5 1.78 = 1.58 × (1 + 12.46%) 0.94
5 Terminal value (TV5) 181.29 = 1.78 × (1 + 12.46%) ÷ (13.56% – 12.46%) 96.00
Intrinsic value of Nike's common stock (per share) \$100.74
Current share price \$94.84

1 DPS0 = Sum of last year dividends per share of Nike's common stock. See details »

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

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Required Rate of Return (r)

 Assumptions Rate of return on LT Treasury Composite1 RF 2.56% Expected rate of return on market portfolio2 E(RM) 13.47% Systematic risk (β) of Nike's common stock βNKE 1.01 Required rate of return on Nike's common stock3 rNKE 13.56%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

Calculations

3 rNKE = RF + βNKE [E(RM) – RF]
= 2.56% + 1.01 [13.47% – 2.56%]
= 13.56%

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Dividend Growth Rate (g)

Dividend growth rate (g) implied by PRAT model

Nike Inc., PRAT model

Average May 31, 2014 May 31, 2013 May 31, 2012 May 31, 2011 May 31, 2010 May 31, 2009
Selected Financial Data (USD \$ in millions)
Dividends on common stock 821  727  639  569  515  475
Net income 2,693  2,485  2,223  2,133  1,907  1,487
Revenues 27,799  25,313  24,128  20,862  19,014  19,176
Total assets 18,594  17,584  15,465  14,998  14,419  13,250
Total shareholders' equity 10,824  11,156  10,381  9,843  9,754  8,693
Ratios
Retention rate1 0.70 0.71 0.71 0.73 0.73 0.68
Profit margin2 9.69% 9.82% 9.21% 10.22% 10.03% 7.75%
Asset turnover3 1.50 1.44 1.56 1.39 1.32 1.45
Financial leverage4 1.72 1.58 1.49 1.52 1.48 1.52
Averages
Retention rate 0.71
Profit margin 9.79%
Asset turnover 1.44
Financial leverage 1.52
Dividend growth rate (g)5 15.22%

2014 Calculations

1 Retention rate = (Net income – Dividends on common stock) ÷ Net income
= (2,693 – 821) ÷ 2,693 = 0.70

2 Profit margin = 100 × Net income ÷ Revenues
= 100 × 2,693 ÷ 27,799 = 9.69%

3 Asset turnover = Revenues ÷ Total assets
= 27,799 ÷ 18,594 = 1.50

4 Financial leverage = Total assets ÷ Total shareholders' equity
= 18,594 ÷ 10,824 = 1.72

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.71 × 9.79% × 1.44 × 1.52 = 15.22%

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Dividend growth rate (g) implied by Gordon growth model

g = 100 × (P0 × rD0) ÷ (P0 + D0)
= 100 × (\$94.84 × 13.56% – \$0.93) ÷ (\$94.84 + \$0.93) = 12.46%

where:
P0 = current price of share of Nike's common stock
D0 = last year dividends per share of Nike's common stock
r = required rate of return on Nike's common stock

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Dividend growth rate (g) forecast

Nike Inc., H-model

Year Value gt
1 g1 15.22%
2 g2 14.53%
3 g3 13.84%
4 g4 13.15%
5 and thereafter g5 12.46%

where:
g1 is implied by PRAT model
g5 is implied by Gordon growth model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 15.22% + (12.46% – 15.22%) × (2 – 1) ÷ (5 – 1) = 14.53%

g2 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 15.22% + (12.46% – 15.22%) × (3 – 1) ÷ (5 – 1) = 13.84%

g2 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 15.22% + (12.46% – 15.22%) × (4 – 1) ÷ (5 – 1) = 13.15%