My Top Dow Dividend Stock to Buy Before the End of the Year (and It's Not Even Close)

There's no sugarcoating how terribly Nike (NKE -0.68%) has performed in 2024. At the time of this writing, the stock is down a staggering 27.4% compared to a 26.8% gain for the S&P 500. The only worse-performing Dow Jones Industrial Average stock this year is Boeing -- a company undergoing a complete makeover to return to positive cash flow and profitability. However, Nike is generating near-record sales and earnings.

So, investors may be wondering why the stock is down so much. The answer has to do with Nike's evolving business model and investor expectations. Here's where Nike came up short, how it can recover, and why Nike is a compelling value in a relatively expensive market.

Image source: Getty Images.

Thinking big-picture with Nike

In 2017, Nike made a bold decision to grow its direct-to-consumer business. Fiscal 2017 was the first year Nike began reporting its Nike brand sales in two buckets -- wholesale and direct-to-consumer (changed to Nike Direct in fiscal 2018). Note that Nike's fiscal year ends on the last Thursday in June.

Data source: Nike

As you can see in the table, Nike Direct had grown to become a larger share of total Nike Brand Sales every year until fiscal 2024.

Nike Direct flourished during the COVID-19 pandemic and helped drive Nike's stock price to an all-time high of $179.10 a share on Nov. 5, 2021. It was a similar narrative as Walt Disney's streaming service, Disney+, which launched in November 2019 and helped Disney grow during the pandemic even when its parks and movie businesses were floundering. Disney hit an all-time high in March 2021 during the height of the pandemic.

Nike Direct has several benefits. It gives Nike more control over its relationship with consumers, boosting engagement with the brand and leading to more customized promotions tailored to customer preferences. However, the biggest downside of Nike Direct is that it somewhat cannibalizes Nike's wholesale business and can even damage Nike's relationship with retailers.

Nike Direct was the company's crown jewel and the anchor of the growth narrative of the investment thesis. But now, Nike Direct is in what looks to be a prolonged downturn. In Nike's most recent quarter (the first quarter of fiscal 2025, ended Aug. 31), Nike's revenue fell 10% compared to the first quarter of fiscal 2024, with Nike Direct down 12% and wholesale down 7%. It's worth mentioning that Nike Direct consists of different marketing strategies, including Nike stores and Nike Digital (sales made through Nike's website or app).

Perhaps the most concerning point from the recent quarter was that Nike stores sales were up 1%, but Nike Digital was down 20%. On the earnings call, the company said it expects Nike Digital sales to be down double digits for the full fiscal year. Put another way, what was the strongest aspect of Nike's business is now its weakest -- which is a legitimate threat to Nike's long-term investment thesis.

Another red flag is leadership uncertainty. Nike's new CEO took the helm on Oct. 14 -- so the upcoming second-quarter fiscal 2025 earnings call will be a chance for investors to hear about management's new strategic direction for the company. But there's a big difference between making plans and implanting them effectively.

Valuation matters

Nike's falling sales and the struggles of Nike Direct are certainly causes for concern, especially when newer brands like On Holding and Deckers Outdoor-owned Hoka are thriving. But Nike's struggles shouldn't distract from the fact that it is still a highly profitable, industry-leading brand.

As you can see in the following chart, Nike's stock price is hovering around an eight-year low even though its sales and earnings have grown substantially over that period.

NKE data by YCharts

Growing earnings paired with a languishing stock price has made Nike a far better value. Analyst consensus estimates have Nike's earnings declining over the next 12 months compared to the trailing 12 months. So Nike's forward price-to-earnings (P/E) ratio is higher than its current P/E. But even then, the forward P/E would still be lower than its median P/E over the last three to 10 years -- illustrating the extent of the discount the market is putting on Nike.

NKE PE Ratio data by YCharts

Another factor Nike has going for it is its capital return program. Over the last decade, Nike has increased its dividend by 186% and decreased its share count by 13.9% -- which has allowed earnings per share to grow faster than net income, making the stock a better value. On Nov. 14, Nike announced an 8% dividend increase, its 23rd consecutive year of raising the dividend.

Making a substantial raise during a challenging period for the business indicates management's confidence that the dividend is affordable. If Nike were in real trouble, we likely would have seen a modest raise to keep the streak alive. With a payout of 2.1%, Nike isn't a high-yield stock, but it can still be a decent source of passive income.

The right way to approach Nike

Long-term investors are getting an excellent opportunity to buy Nike while it is on sale. However, it's important to be mindful of the factors weighing on the company.

Nike's top brands are under pressure from competition, and Nike's direct-to-consumer approach has not been working. A bad fiscal 2025 is likely already baked into the stock price, but if Nike progresses throughout the year and its downturn shows no signs of ending, then the stock price is probably not going to react favorably. Even investors who believe in the Nike brand may still want to listen to a few earnings calls with the CEO before pouncing on the stock.

In sum, Nike is an excellent stock to buy now, but if you do, just make sure you approach the investment in a way that suits your risk tolerance.