Adidas (ADDYY): The Looming Dividend Cut Amid Financial Vulnerability and Tariff Headwinds

Adidas AG (ADDYY) has long been a symbol of athletic innovation, but its recent financial trajectory reveals a company teetering between growth and vulnerability. While Q2 2025 results showcased a 12% currency-neutral revenue increase and a 58% surge in operating profit to €546 million [1], these gains mask deeper structural risks. The proposed 2025 dividend of €2.00 per share—a 185% jump from 2024—now appears precarious amid deteriorating cash flow dynamics and looming macroeconomic threats [2].

Financial Vulnerability: A House of Cards?

Adidas’s debt-to-equity ratio of 2.30 as of March 2025 underscores its heavy reliance on leverage [3]. While the interest coverage ratio of 15.9x suggests short-term solvency, the company’s free cash flow (FCF) has turned negative. Q1 2025 saw FCF at -€1.08 billion, and Q2 FCF dipped to -€88 million [4]. This inversion of FCF relative to operating cash flow—a critical red flag for dividend sustainability—indicates that Adidas is spending more on capital expenditures than it generates from operations. Over the trailing twelve months, FCF coverage fell to 0.70, signaling a systemic inability to fund operations without external financing [5].

The situation is exacerbated by U.S. tariffs, which Adidas estimates could add €200 million in costs for H2 2025 [6]. CEO Bjørn Gulden’s admission that price hikes will be “confined to the U.S. market” highlights the company’s limited pricing flexibility [7]. With gross margins already compressed at 51.7%, any further cost inflation could erode profitability and force a reassessment of dividend commitments.

Dividend Policy: A 43% Payout in a Weak Cash Flow Environment

Adidas’s 2025 dividend payout ratio of 43% aligns with its stated target of 30%–50% of net income [8]. However, this metric obscures the disconnect between earnings and cash flow. For instance, Q1 2025 reported a net income of €436 million but a negative operating cash flow of €984 million [9]. This discrepancy suggests that non-cash items (e.g., depreciation, inventory write-downs) are inflating earnings while cash reserves dwindle. If FCF remains negative, Adidas may struggle to fund both its dividend and operational needs, particularly as debt servicing costs rise.

Investor Implications: A Dividend Cut is Not a Question of If, but When

Investors must weigh Adidas’s short-term optimism against its long-term fragility. The company’s current ratio of 1.25 and quick ratio of 0.67 [10] indicate limited liquidity to weather a prolonged downturn. S&P’s stable outlook upgrade hinges on “disciplined inventory management” and “strong order books” [11], but these advantages may evaporate if U.S. tariffs trigger a demand slowdown. A dividend cut would not only disappoint shareholders but also signal a shift in strategy toward preserving liquidity—a move that could erode investor confidence.

Conclusion: Reassessing the Risk-Reward Balance

Adidas’s Q2 performance is a testament to its brand resilience, but the financial underpinnings of its dividend policy are unsustainable. With FCF in freefall, tariffs looming, and debt levels elevated, the €2.00 per share payout is a high-stakes gamble. Investors should monitor Q3 2025 results closely for signs of a dividend reassessment and consider hedging exposure to macroeconomic shocks. In a deteriorating market environment, Adidas’s dividend may prove to be a glittering illusion rather than a sustainable promise.

Source:
[1] Continued strong double-digit growth for adidas brand in the second quarter of 2025 [https://www.adidas-group.com/en/media/press-releases/continued-strong-double-digit-growth-for-adidas-brand-in-the-second-quarter-of-2025]
[2] Dividend Overview [https://www.adidas-group.com/en/investors/share/dividend-overview]
[3] Adidas AG Debt/Equity Ratio 2010-2025 [https://www.macrotrends.net/stocks/charts/ADDYY/adidas-ag/debt-equity-ratio]
[4] Adidas AG (ADDYY) - Cash Flow from Operating Activities [https://www.alphaquery.com/stock/ADDYY/fundamentals/quarterly/cash-flow-operating-activity]
[5] Adidas' Dividend Sustainability: A Crisis Brewing Beneath [https://www.ainvest.com/news/adidas-dividend-sustainability-crisis-brewing-beneath-surface-2505/]
[6] ADIDAS (ADS) earnings Q2 2025 [https://www.cnbc.com/2025/07/30/adidas-ads-earnings-q2-2025.html]
[7] Adidas braces for $230M tariff hit in the back half of the year [https://www.retaildive.com/news/adidas-two-hundred-million-trump-tariff-impact/756290/]
[8] Adidas AG Free Cash Flow 2010-2025 [https://www.macrotrends.net/stocks/charts/ADDYY/adidas-ag/free-cash-flow]
[9] Adidas AG (ADDYY) - Cash Flow from Operating Activities [https://www.alphaquery.com/stock/ADDYY/fundamentals/quarterly/cash-flow-operating-activity]
[10] Adidas (ADS1) Financials: Ratios [https://www.tipranks.com/stocks/de:ads1/financials/ratios]
[11] Adidas' Debt Rating Outlook Upgraded as H1 Performance Exceeds Targets [https://sgbonline.com/adidas-debt-rating-outlook-upgraded-as-h1-performance-exceeds-targets/]
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