Lowe’s Delivers Consistent Dividend Growth to Investors

Lowe’s Companies, Inc. (LOW) operates as a home improvement retailer. Lowe’s operates approximately 1,840 home improvement and hardware stores in North America. The company also sells its products through online sites comprising Lowes.com, Lowes.ca, and ATGstores.com, as well as through mobile applications. I last analyzed Lowe's a couple of years ago, so I decided to do a quick update on it.

Lowe’s recently announced that it was raising its quarterly dividend by 21.70% to 28 cents/share. This marked the 53rd consecutive annual dividend increase for this dividend king. As we have discussed the dividend kings before, this is an elite group of companies that have raised distributions for at least 50 years in a row. It is a rare feat when a company has managed to grow dividends every year for over half a century. It is an even rarer accomplishment when that company is firing up on all cylinders, and keep growing dividends at the rate of Lowe’s.

The ten year dividend growth rate for Lowe’s is an impressive 25%/year. The company managed to grow earnings per share by 7.10%/year. Therefore, a large reason behind the high dividend growth is due to expansion in the dividend payout ratio. However, you should not forget that the past decade also included one of the worst housing crises in the US and the recession of 2007 – 2009. One of the main reasons I picked up Lowe’s after the housing crisis is because management kept raising the dividend. When they raised the dividend, this showed me that they had confidence in the long-term sustainability of the business.

Competitor Home Depot (HD) on the other hand stopped raising dividends in 2008.

As I mentioned above, earnings per share grew at a respectable 7.10%/year over the past decade, which included a terrible housing crisis. Lowe’s earned $2.71/share in 2015. The company is expected to earn $3.29/share in 2016 and $3.95/share in 2017. Lowe’s also has had an aggressive share buyback policy over the past decade. As a result, the company has reduced its share count from 1.606 billion shares in 2006 to 990 million shares in 2015. While I would prefer special dividends to share buybacks as a stockholder, I would get what I can.

The company’s fortunes are tied to the fortunes of the housing market in North America. As the US housing market bounces back, this could translate into more traffic to home improvement stores, and to high growth in same store sales. As the housing market improves, there will be more remodeling, and more need for store trips to Lowe’s or Home Depot to accommodate for that remodeling. An up-tick in new home construction could also provide another source of growth. The company focuses on do-it-yourself, do it for me customers as well as commercial customers.

Research shows that renovations tend to accelerate for homes older than 25 years. According to latest Census, 71% of homes in the US have been built more than 25 years ago. As a result, homeowners will be much more likely to participate in do it yourself home renovation and upkeep projects, in order to try to increase the value of their home, to make it more marketable or just to make it a better place to live.

A further source of growth will be the opening of new stores. Unfortunately, the level of new store openings has slowed down to 15 – 20/year. In the long-term, the company can capture growth by expanding internationally, beyond North America. This could be an interesting development to check. Currently, it has operations in US, Canada and Mexico, as well as an Australian Joint-Venture with Woolworths where Lowe’s has a one-third share of the ownership. I like the fact that the company is only interested in expanding in international markets after intense analysis, and only if their research determines that expansion will support compelling long-term returns.

Being the second largest home improvement retailer, Lowe’s also has scale and strong purchasing power. This bargaining power translates into lower costs, and higher profits. Another important characteristic for Lowe’s and competitor Home Depot is the fact that their knowledgeable staff can deliver quality level of service, and the knowledge to address the specific customer needs. This is something that is difficult to maintain in a purely online shopping experience. The company is aiming to enhance its relevance to customers through omni-channel retailing and differentiate itself through better customer experiences.

The company is continued focus on developing its omni-channel retail capabilities. Thus it is ensuring Lowe's meets customer needs whenever and wherever they choose to engage with the company, whether in store, in home and on the job, online and through contact centers. The company is also focused on further building customer experience design capabilities that differentiate Lowe's from other home improvement providers, improving its offering for Pro customers and continuing to improve productivity and profitability.

Currently, the stock is overvalued at 21.20 times forward earnings and a current yield of 1.60%. While I do not believe that the company is a buy at present levels, it is definitely a hold. I think it is important to keep companies purchased at attractive prices, and to monitor them at least once every 12 – 18 months. I do not subscribe to the theory that I should sell a company, merely because the price is a little on the high side, and buy something “cheaper”. I believe holding on to a company like Lowe’s, which grows intrinsic value over time is a wise decision. However, wise investors will know that Lowe’s is exposed to the cyclical nature of the housing market, which is why its results are not going to look pretty during the next recession. This would be the time to scoop up more shares of the retailer, provided the fundamentals are still intact.

Full Disclosure: Long LOW

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