Nike Now Yields More Than Coca-Cola. Is the Turnaround Finally Priced In?

Nike's latest dividend yield of 4% now surpasses Coca-Cola's 2.4%, despite Nike having a lower share price. This yield, while significant, is driven by the company's declining stock price rather than its inability to sustain dividend payouts. The market may be undervaluing Nike as it prepares for a successful turnaround. Although Nike's revenue declined in the latest results, its underlying narrative is becoming more encouraging.

The company's improvement in margins and profitability, paired with potential inventory recovery, could lead to meaningful growth in the coming years. Companies like Nike, which are mature and dominant, often pay above-average yields to attract investors seeking income before potential market-beating appreciation. Nike's recent declaration of a $0.41 dividend, payable on October 1, supports its annualized payout of $1.64 per share.

Despite an elevated payout ratio, Nike retains sufficient cash flow to cover its quarterly dividends, particularly due to the anticipated rebound in fiscal 2027. Analysts predict free cash flow will rise to $3 billion in fiscal 2027, aligning with the positive trends in margin stabilization that Nike is experiencing. While Nike's trailing 12-month free cash flow is $2.2 billion, which is below its $2.4 billion in dividend distributions, a rebound in cash generation is expected as management focuses on inventory cleanup.

Nike offers both income potential and upside, unlike Coca-Cola. Full-year sales for Nike remained nearly flat at around $46 billion (down 2% on a currency-neutral basis). However, the company's recent earnings report reveals signs of improving fundamentals. Demand remains weakest in lifestyle categories, such as sportswear and Jordan streetwear, which account for about half of Nike's sales.

However, performance wear is holding up better, and this category represents the core of Nike's brand. Nike Running is a standout performer, delivering five consecutive quarters of double-digit growth. Management also points to improved retail trends in training and global football. These strengths suggest Nike is excelling where it traditionally performs best—performance products—and that healthier growth can return as the company refines inventory levels and focuses on its strongest franchises.

This improved outlook is reflected in Nike's current valuation, which trades at about 1.3x sales, significantly below its historical norm of 2.0x or higher. If Nike successfully cleans up inventory, enhances its sales mix, and boosts margins, investors could reward the stock with a higher multiple. Although the path to turnaround may be challenging in a cautious consumer environment, the combination of a high yield and a discounted price-to-sales ratio suggests the market has not fully priced in a successful turnaround. This presents an opportunity for investors to gain meaningful upside potential.