Updated on January 23rd, 2023 by Jonathan Weber
Lowe’s Companies (LOW) has a highly impressive track record of long-term dividend growth. The company has increased its dividend for over 50 years in a row. This makes Lowe’s a rare dividend stock, even among the Dividend Aristocrats, as the company qualifies for Dividend King status thanks to more than 5 decades of annual dividend increases.
Every year, we review each of the Dividend Aristocrats, a group of 65 companies in the S&P 500 Index with 25+ consecutive years of dividend increases.
We have built a full list of all 65 Dividend Aristocrats. You can download a free copy of our Dividend Aristocrats list, along with important metrics like dividend yields and payout ratios, by clicking on the link below:
In addition to being a Dividend Aristocrat, Lowe’s is on the exclusive list of Dividend Kings, which have raised their dividends for an amazing 50+ years in a row. You can see the entire list of Dividend Kings here.
Lowe’s’ dividend yield is slightly higher than the yield of the S&P 500 Index right now, at 2.1%. Lowe’s also is a high-growth dividend stock. This article will discuss Lowe’s’ business model, growth potential, and valuation.
Lowe’s was founded in 1946. In the 75 years since, it has grown into the second largest home improvement retailer, behind only The Home Depot (HD). Lowe’s generates around $95 billion in annual sales.
The company operates about 2,200 stores in the U.S., Canada, and Mexico. Lowe’s offers a wide range of products, for maintenance, repair, remodeling, and decorating the home. It has a wide selection of leading national brands, as well as a large number of private brands.
Lowe’s reported a solid quarter for Q3 2022.
Source: Investor Relations
Revenue increased 2.5% to $23.5 billion from $22.9 billion in the previous year’s quarter. Earnings rose by a much larger 19%, to $3.27 per share. This was possible thanks to Lowe’s being able to lift its gross margins, while higher sales, operating leverage, and buybacks also played a role. For fiscal 2022, the company has guided for revenues of $97 billion.
We believe that Lowe’s will deliver 6% annual earnings-per-share growth over the next five years. Lowe’s has a long runway of growth up ahead.
Lowe’s has made a concerted effort in recent years to improve its in-store experience for customers through merchandising and inventory practice optimization, as well as investing in the capabilities to fulfill orders outside of its stores.
This includes special features for Pro customers that drive recurring revenue, as well as making it easier for DIY customers to order their products online, and pick them up or have them delivered. This is a strategic shift from the old model Lowe’s operated under, and it has worked well in recent years.
The recent years have been a difficult time for many retailers. The brick-and-mortar industry is under fierce pressure from e-commerce competition. Lowe’s, however, has shrugged off the poor performance of the broader retail industry. It continues to perform well, as consumers remain willing and able to spend on their homes, and since the goods that Lowe’s sells aren’t easily sold online, e.g. due to high transportation/deliver costs.
In addition, while consumers desire the convenience of online shopping, many still value the in-store shopping experience for home improvement products. This is how Lowe’s has continued to grow over the past few years, even though many other retailers are struggling.
Lowe’s continues to see operating leverage from rising revenue as it has benefited from several fundamental tailwinds. Rising wages and aging housing stock are incentivizing more consumers to invest in their homes for larger projects. These tailwinds should continue to fuel growth for Lowe’s in the years ahead.
Lowe’s generally opens a small number of new stores each year, so that is not a meaningful driver of growth. However, it continues to find ways to capitalize on rising housing and construction spending, and we see these as growth drivers moving forward due to still relatively low mortgage rates, whether or not the store count rises.
The U.S. economy continues to grow, despite growth headwinds such as high inflation rates. Positive GDP growth is arguably the most important economic indicator for Lowe’s, as the company is highly reliant on consumer spending. The continued U.S. economic recovery from the 2020 coronavirus pandemic is a positive catalyst for Lowe’s.
Outside of the U.S., Lowe’s has targeted Canada as a key growth market. In 2016, Lowe’s acquired Canadian home improvement retailer Rona for $2.3 billion. Adding Rona gave Lowe’s access to the attractive Canadian home improvement market, which grew at a 4% annual rate in recent years.
Lowe’s has steadily been repurchasing shares on the open market in recent years. These buybacks shrink the company’s share count, which translates into a growing portion of the overall profits that the company generates for each remaining share. Buybacks have thus been a major driver in the compelling earnings-per-share growth that Lowe’s enjoyed, and we believe the same will hold true in the future:
The combination of continued expansion in e-commerce, overall economic growth in the long run, and operating should drive profits for Lowe’s. With the impact of buybacks added, we believe annual earnings-per-share growth in the mid-single-digit range is very much achievable.
Competitive Advantages & Recession Performance
The retail industry typically does not offer many competitive advantages. This is a highly challenging retail environment, as the rise of Amazon and other Internet retailers threatens to undercut brick-and-mortar stores. Consumers have shifted spending dollars toward e-commerce for the convenience and low prices.
However, Lowe’s is a specialty retailer, which provides it with a competitive advantage. Home improvement projects are often complex. Consumers are willing to travel to stores, to inspect products in person, and to ask questions to staff members. This has helped protect home improvement retailers from Amazon (AMZN) so far. Since shipping the goods that are sold at Lowe’s would also be very costly for Amazon and other online retailers, e-commerce is not a major threat for Lowe’s.
Lowe’s operates in an industry that is essentially a duopoly; Lowe’s dominates home improvement retail along with competitor Home Depot. There are smaller regional home improvement retailers, but those don’t have the scale to compete efficiently on a national level.
That said, Lowe’s is not immune from recessions. The consumer is at risk of declining during economic downturns. Lowe’s depends on a financially-healthy consumer, with solid housing and construction markets. The Great Recession was a particularly steep downturn, which took a significant toll on Lowe’s bottom line.
Related: The 10 best construction stocks analyzed on Sure Dividend.
Lowe’s earnings-per-share during the Great Recession are below:
- 2007 earnings-per-share of $1.86
- 2008 earnings-per-share of $1.49 (20% decline)
- 2009 earnings-per-share of $1.21 (19% decline)
- 2010 earnings-per-share of $1.44 (19% increase)
Lowe’s earnings fell sharply during the recession, but the company still remained profitable. This helped it continue increasing its dividend each year. And, it bounced back reasonably quick, as by 2013, Lowe’s earnings-per-share had surpassed 2007 levels.
Lowe’s also performed well in 2020 when the U.S. economy was driven into a recession by the coronavirus pandemic. Demand for home improvement products remained steady, and Lowe’s was able to capitalize both in terms of its physical stores and its e-commerce platform. In 2022, when rising interest rates have hurt housing demand, Lowe’s has also continued to grow its sales and profits.
Valuation & Expected Returns
Lowe’s trades at a price-to-earnings ratio of 15 after declining slightly over the last year. This is less than our fair value estimate of 19 to 20 times earnings, so we see the stock as undervalued. As a result, an expanding price-to-earnings ratio could increase future returns by approximately 5% per year for the next five years.
In addition to valuation changes, Lowe’s returns will consist of earnings growth and dividends.
We see annual earnings-per-share growth at 6% annually, plus the current 2.1% yield, and a boost from an expanding valuation multiple. That would produce overall total annual returns in the 13% range, which is an attractive potential rate of return.
The dividend payout ratio remains near 30% of earnings, so there is certainly plenty of room for additional dividend growth in the coming years. We see Lowe’s as one of the better large-cap dividend growth stocks in the market today, in terms of expected total returns and dividend reliability.
Lowe’s has a solid dividend yield of slightly more than 2%, above the average for the S&P 500 Index, and it offers a high dividend growth rate. The company consistently provides double-digit dividend growth each year. The current environment is difficult for retail, but Lowe’s operates in a niche that should withstand competitive threats from Internet-based retailers.
Lowe’s is still growing sales and earnings, which should allow for continued dividend growth. And, it has a conservative dividend payout ratio, which also supports high dividend increases. With a high expected rate of return of around 13% per year, Lowe’s stock receives a buy rating at current prices.
Additionally, the following Sure Dividend databases contain the most reliable dividend growers in our investment universe:
- The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.
- The Dividend Champions: Dividend stocks with 25+ years of dividend increases, including those that may not qualify as Dividend Aristocrats.
- The Dividend Achievers: dividend stocks with 10+ years of consecutive dividend increases.
- The Dividend Kings: considered to be the ultimate dividend growth stocks, the Dividend Kings list is comprised of stocks with 50+ years of consecutive dividend increases
If you’re looking for stocks with unique dividend characteristics, consider the following Sure Dividend databases:
- The Complete List of Monthly Dividend Stocks: stocks that pay dividends each month, for 12 payments over the year.
- The Blue Chip Stocks List: this database contains stocks that qualify as either Dividend Achievers, Dividend Aristocrats, or Dividend Kings.