Lowe’s Companies (LOW), one of the Fortune 50 constituents, is the second-largest home improvement retailer in the world, just behind Home Depot (HD). The company runs nearly 2,000 home improvement and hardware locations, comprising a sales floor of 208 million square feet.
Lowe’s has been historically appreciated among income-oriented investors for its Dividend King status. This unofficial term is often used by investors to describe these companies which have increased their dividends annually for more than 50 consecutive years.
Lowe’s now numbers 60 years of consecutive dividend increases following the latest dividend hike in late May. Besides the hike reflecting the strength and consistency of Lowe’s cash flow and management’s continued commitment to returning capital to shareholders, dividend growth has been accelerating over the past couple of years quite impressively.
Note that shares of Lowe’s are currently trading about 30% lower from their 52-week highs of $263.31. Besides the overall market sell-off pulling the stock lower, investors are likely worried about the risks attached to a company in the consumer discretionaries sector.
As the ongoing macroeconomic turmoil persists, including sky-high inflation levels and elevated energy-related costs, the market presumably fears a decline in consumers’ purchasing power. Further, there could be a reduction in Lowe’s margins (e.g., due to higher shipping costs) that could have a material impact on the retail giant’s earnings.
Then again, major economic indicators regarding the health of the economy remain vigorous, especially when it comes to unemployment levels and ongoing consumer spending.
Nevertheless, with Lowe’s valuation having corrected notably following the ongoing sell-off and the company accelerating its capital returns, the stock’s investment case could appeal to long-term dividend growth investors. Still, due to the underlying risks enduring these days, I am neutral on the stock.
Lowe’s Q1-2022 results came in quite strong, despite slightly weaker top-line numbers. Total sales came in at $23.7 billion versus $24.4 billion in the prior-year period, with comparable sales decreasing 4.0%. Specifically, comparable sales for the U.S. Home Improvement segment fell 3.8% year-over-year.
However, there are two factors to note here. Firstly, last year’s sales were still enjoying momentum from the increased DIY home-improvement trend as a result of the working-from-home shift in the economy. Therefore, the comparison to last year’s sales is a bit tough. Secondly, Lowe’s experienced a delayed spring selling season as a result of protracted unfavorable weather in late Q1 that negatively affected spring-related categories.
As management mentioned in the company’s Q1 earnings call, unfavorable weather lasted until this past April, which was the coldest and wettest in over 20 years. Thus, home-improvement sales were pushed back. With the weather finally normalizing, it’s likely that Lowe’s will see these “deferred” sales occurring in Q2 and Q3, thus normalizing the company’s performance from an annual point of view.
Despite the slightly compressed sales, Lowe’s managed to deliver a 65 basis point operating margin improvement, resulting in diluted earnings per share of $3.51. This implies an increase of just 9.3% compared to last year. This reflects great cost discipline and robust pricing power capabilities, which are critical elements during the ongoing environment and highlight the company’s resiliency.
For Fiscal 2022, management expects diluted EPS to land between $13.10 and $13.60, the midpoint of which suggests 10.8% growth compared to Fiscal 2021.
Double-Digit Capital Return Yield
As mentioned, Lowe’s features an exceptional track record of dividend increases that spans over six decades. However, dividend growth has been accelerating recently. Following Lowe’s 33.3% dividend per share increase in May of 2021, another substantial dividend increase of 31.3% took place this past May. These are the largest hikes in 15 years, with management likely aiming to retain a strong income-oriented shareholder base during the current inflationary environment.
Despite the two sequential tremendous increases, Lowe’s payout ratio stands at just 31.4%, based on the midpoint of management’s guidance.
Lowe’s share repurchases further contribute to the company’s total capital returns. The company repurchased 19 million shares in Q1 for $4.1 billion. It also plans its total stock buybacks to amount to $12 billion during Fiscal 2022. This implies a “buyback yield” of 10.2%, which, combined with the dividend yield of 2.4%, sums to a blended investor yield of around 12.6%. Few companies are currently returning this much money to shareholders, and even fewer of them can claim the qualities of Lowe’s.
Wall Street’s Take
Turning to Wall Street, Lowe’s has a Strong Buy consensus rating based on 15 Buys and five Holds assigned in the past three months. At $232.78, the average Lowe’s price target suggests 26.4% upside potential.
Valuation & Takeaway
Lowe’s stock is currently under pressure amid the overall market sell-off, and risks are attached to consumer discretionaries due to the current environment. Yet, the company’s results remain relatively robust, management’s guidance is optimistic, and capital returns have been accelerating.
Shares trading are currently trading at a next-twelve-month (forward) P/E of 13.2, which besides being rather humble alone, it’s also near the low-end of the stock’s 20-year average forward P/E range. Therefore, long-term dividend growth investors are likely to find Lowe’s investment case quite fruitful at the stock’s current price levels.