Updated on March 2nd, 2021 by Bob Ciura
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.
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 average when compared with the S&P 500 Index. However, Lowe’s 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 73 years since, it has grown into the #2 home improvement retailer, behind only The Home Depot (HD). Lowe’s generates $72 billion in annual sales.
The company operates about 2,000 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 had another strong year in 2020. Adjusted earnings-per-share increased 41.5% in the fourth quarter, due to 28.1% comparable sales growth. For the year, comparable sales increased 26% and adjusted earnings per share grew 54% to $8.86. Lowe’s benefited from the continued strength in the housing market.
We forecast 7% annual EPS growth over the next five years. Lowe’s has a long runway of growth up ahead.
Source: Investor Presentation
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.
This is a difficult time for most 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, 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. As mentioned, Lowe’s has greatly improved its core in-store experience, and it has shown up in the company’s results.
Lowe’s continues to see operating leverage from rising revenue as it has benefited from several fundamental tailwinds. The economy continues to grow, as does the housing market. Rising wages and home prices are incentivizing more consumers to invest in their homes. These tailwinds should continue to fuel growth for Lowe’s in the years ahead.
Lowe’s generally opens a small amount of new stores each year, so that is not a meaningful driver of growth. However, it continues to find ways to capitalize on strong housing and construction spending, and we see these as growth drivers moving forward, whether or not the store count rises.
The U.S. economy continues to grow. Positive GDP growth is arguably the most important economic indicator for Lowe’s, as the company is highly reliant on consumer spending. Other important economic indicators for Lowe’s – which include the unemployment rate and housing prices – are trending in a positive direction as well.
The continued U.S. economic recovery from the 2020 coronavirus pandemic is a positive catalyst for Lowe’s in 2021 and beyond.
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 from 2014 to 2018. Rona’s footprint is concentrated in Quebec, which is home to ~25% of the country’s home improvement market.
Lowe’s has enjoyed not only the sales growth that came with the Rona acquisition, but synergies as well, totaling hundreds of millions of dollars annually. The Canada business continues to perform well and Lowe’s is investing in that country to fuel future growth as the core U.S. business is maturing somewhat.
Lastly, Lowe’s is building its own digital platform, to keep up with e-commerce retailers. The company’s omni-channel strategy is working, as sales increased 121% on Lowes.com last quarter.
The combination of continued expansion in e-commerce, the steady overall economic recovery should allow Lowe’s to reach its financial targets. We also see expansion of operating margins and share repurchases as fueling 7% annual earnings-per-share growth in the coming years.
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 ask questions to staff members. This has helped protect home improvement retailers from Amazon (AMZN) thus far.
In addition, Lowe’s has the scale to compete on price, even with web retailers. Lowe’s operates in an industry that is essentially a duopoly; Lowe’s dominates home improvement retail along with competitor Home Depot.
Lowe’s has the scale to reap significant efficiencies in distribution, and with suppliers. It can leverage its size to keep costs low, which it can then pass on to customers in low prices. This helps drive operating leverage that boosts margins.
That said, Lowe’s is not immune from recessions. Consumer spending typically declines during economic downturns. Lowe’s depends on a financially-healthy consumer, with strong housing and construction markets. The Great Recession was a particularly steep downturn, which took a significant toll on Lowe’s bottom line.
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 just as quickly: 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.
Valuation & Expected Returns
Lowe’s has a price-to-earnings ratio of 17.3 after a significant rally in the past year. This is in excess of our fair value estimate of 20 times earnings, so we see the stock as somewhat undervalued.
Lowe’s stock currently trades below our fair value estimate. As a result, an expanding price-to-earnings ratio could increase future returns by approximately 2.9% per year. In addition to valuation changes, Lowe’s returns will consist of earnings growth and dividends.
We see annual earnings-per-share growth at 7% annually, plus the current 1.5% yield, and a boost from an expanding valuation multiple. That would produce overall total annual returns in the 11.4% range, which is certainly an attractive potential rate of return.
The dividend 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 epected total returns.
Lowe’s has a relatively low dividend yield below 2%, but it makes up for this with high dividend growth rates. 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 low dividend payout ratio, which also supports high dividend increases. With a high expected rate of return above 10% per year, Lowe’s stock receives a buy rating.