Should You Avoid Nike as ‘Tariff Man’ Trump Returns?

Donald Trump, a figure synonymous with protectionism and tariffs, is poised to reclaim the Oval Office as the 47th president of the United States. His return comes with renewed concerns about trade policy, and many are wondering: should investors steer clear of certain dividend stocks amidst the turbulence? One name that has notably surfaced is Nike (NKE), a company that has faced considerable challenges in recent times. Although the broader markets surged to record highs following the election, Nike experienced a significant downturn that leaves investors questioning its future.

Tariff Talk: The Impact on Nike

Trump’s “tariff man” persona is well-documented, especially during his first term. He previously proposed a staggering 60% tariff on Chinese imports, a move that is music to the ears of American manufacturing sectors such as steel but sends shivers down the spine of companies with deep ties to China. Nike is among the U.S. companies heavily reliant on Chinese sourcing for its production, allowing it to keep costs low for years. Even with many Western firms diversifying their supply chains to shield against U.S.-China tensions, the reality remains that China is irreplaceable for many.

While Trump may not enact factory-crippling tariffs akin to his earlier rhetoric, his commitment to limiting imports is likely to resurface. The potential fallout could lead to higher consumer prices, increased inflation, and, subsequently, worsened relationships with crucial markets like China—one that Nike cannot afford to neglect.

The Current State of Nike’s Dividend Yield

As bad news often comes in bunches, Nike’s share price has plummeted more than 50% since its peak in 2021. Consequently, its dividend yield has crept up to 2.1%, surpassing the S&P 500 average for what is almost a rarity for the brand. It becomes even more curious when you notice that Nike is the second-worst performer in the Dow Jones Industrial Average this year, just ahead of Boeing (BA). The question remains whether this high yield compensates for the potential risks ahead.

The Risk of Deteriorating U.S.-China Relations

It’s essential to recognize that the implications of deteriorating U.S.-China relations weigh heavily on Nike’s performance. Not only could a less favorable relationship alienate Chinese consumers—who have grown increasingly wary of U.S. brands—but tariffs may also significantly erode Nike’s margins. Contrary to common misperceptions, tariffs are largely paid by American consumers and companies importing these goods, not the foreign entities producing them. Thus, a trade war could further strain Nike’s profitability.

Nike: A Turnaround Play or a Dead-End?

Turning our gaze to the internal issues Nike faces, the company suffers not only from external pressures but also from a lack of innovation in recent years, allowing competitors like Adidas (ADDYY) and emerging brands like Hoka and New Balance to gain on them. The strategy of reducing wholesale sales created a shortfall, hurting relationships with third-party retailers and inadvertently benefiting competitors at Nike’s expense. The troubling trajectory led to the return of former CEO Elliott Hill, replacing John Donahoe, in pursuit of a turnaround. Yet, even as Hill stepped back in, investors remain skeptical about how quickly Nike can regain its competitive edge.

Looking Ahead: Analyst Perspectives and Stock Forecasts

According to analysts, Nike has garnered a consensus rating of “Moderate Buy” across 31 coverage analysts. However, there remains a divided sentiment among them, with nearly half rating it as “Hold” or equivalent and cautious due to uncertainties surrounding its turnaround strategy. Nevertheless, noted billionaire investor Bill Ackman has shown faith in the brand, increasing his stake to about $1.4 billion by the end of September 2023.

Nike’s current price-to-earnings (P/E) multiple is quite steep at over 26x, but investors must ask whether the fundamental business can rebound. While sales are expected to decline in the upcoming quarters, the prospect for recovery hinges on whether Nike can adapt to the changing landscape.

Conclusion: A Cautious Outlook

Nike’s stock is not likely to rally overnight, especially with Trump’s return casting a shadow of uncertainty. However, I would adopt a cautiously bullish stance on Nike, albeit with a recognition of the volatility that may accompany it. As Matthew Friend, Nike’s CFO, insightfully noted in the fiscal Q1 earnings call, “Throughout our history, NIKE has always faced pressure. NIKE was born through adversity. Every obstacle, every setback was an opportunity to learn, to adjust, and to improve.” Let’s hope that, despite the challenges ahead, Nike can rise to the occasion.