A 25 Year Case Study of Nike
We are going to look and see today what would have happened if you had invested $100,000 in Nike on the first trading day of January 1988. I am sure you have hear of Nike Inc. (NKE), as they are one of the largest sports outfitters around. The company generates loads of cash from their sports clothing and equipment, and you probably have several items in your house right now made by them.
In Janury 1988, you write a check for $100,000 and receive 6,510 shares of Nike that you have locked in a safe deposit box. There are two scenarios that could happen:
You could have set up your account so that the dividends that were received from Nike all get reinvested into new shares of the stock. If you had constantly reinvesting the dividends earned in the stock, taking advantage of market drops to buy more absolute shares with the dividends, you would have done remarkably well. Despite multiple wars, market recessions, terrorist attacks, and other world events you would be sitting on an enormous amount of wealth.
You would have 301,930 shares of NKE stock (since the stock split 2:1 5x times), of which 208,333 were your initial shares and 93,596 would have been from your reinvested dividends. These shares would have a current market value of $17,804,789, and would currently yield $63,405 (NKE’s dividend yield is quite low).
This translates to a ridiculously high 23.03% Compound Annualized Growth Rate. You won’t normally be able to get these kinds of returns, especially for 25 years, but Nike has massively grown since the late 80′s. It is important to remember the fact that this level of return is an anomaly. Usually, with a fairly or bargain priced blue chip stock, you might expect to return anywhere from 8-14% over the course of 25 years. In 1988, Nike wasn’t the massive company they are now, and it would have been a riskier investment than, say, General Mills (GIS) or General Electric (GE).
If you had spent the dividend check every quarter, you would be sitting on 208,333 shares of stock worth $12,285,416. However, you would have been able to spend $1,158,973 over the course of 25 years (for an average of $46,359/year). In total, your return would have been $13,444,390 (for a 21.66% CAGR).
Again, this investment would have paid off ridiculously well for you, despite multiple wars, terrorist attacks, PR issues with kids in sweatshops, two financial crises, massive sovereign debt issues, and a whole host of other international and domestic problems. The price you would have had to pay is watching a few 30% drops in the price other people are willing to pay for your Nike (NKE) shares. This shouldn’t have upset you, however, since you paid a reasonable price for the business, and when you read the annual reports and quarterly financials you knew that the profit-generating power of the company was still entirely intact. You did nothing beyond write a check, yet got to enjoy massive benefits from not spending your money as a young person. Always remember that time is on your side.
Since Nike (NKE) would probably have been a slightly more speculative investment back in the late 80′s you likely would not have put an entire $100,000 into the company (unless you had done a lot of research and knew the company was well-priced). Even still, a relatively small $10,000 investment would be worth $1,228,542 and have paid you $115,897 in dividends that you were able to spend and enjoy. That is success. That is financial freedom. All from some hard-earned savings and a good investment.