Dividend Aristocrats

Lowe’s Stock, a 56 Year Dividend Aristocrat

Lowe’s Stock is a member of the elite S&P 500 Dividend Aristocrats index. This index comprises of companies that have not only paid dividends for 25 consecutive years, but also raised them in each of the years. Dividend aristocrats are regarded as some of the best cash flowing companies in in the world and very much liked by income investors.

Lowe’s is one of those prestigious companies having raised dividends for 56 years in a row. Management last increased its quarterly dividend from 48 cents a share in May 2019 to 55 cents a share in August 2019.

For the purposes of this article, we will review Lowe’s business operations, latest financial results, dividend growth history, stock valuation and performance to the broader market S&P 500 index.

Table of Contents

This article is broken down in to sections, feel free to jump to the area that interests you.

Business Synopsis

Lowe’s is a home improvement retailer serving over 18 million customers every week in the United States, Canada and Mexico. Founded in 1946, Lowe’s operates 1,977 home improvement and hardware stores in US and Canada. A typical Lowe’s Store stocks approximately 34,000 products from 13 different merchandising categories at any one time. Some of these categories include Appliances, Decor, Flooring, Hardware, Kitchen and Bath, Lawn & Garden, Lighting, Lumber & Building Materials.

Employing 190,000 full time associates, Lowe’s defines its customers across 3 categories.

  • Retail DIY – These are do-it-yourself homeowners or renters who perform renovation projects on their own homes.
  • Retail DIFM – These are retail do-it-for-me customers who use Lowe’s Installation Services, Extended Protection and Warranty Plans. The company offers installation services through independent contractors who perform jobs like flooring, kitchen, lumber, millwork and building services.
  • Pro – Pro customers make up almost 25% of total sales. These are construction and trades professionals doing remodeling, repairs or specialty trades. Pro customers also include repair and maintenance professionals.

Lowe's Customer Profile

The home improvement market in the United States is $900 billion annually and Lowe’s has captured just about 8%. This presents a solid growth opportunity for management to grow the business over the next decade. Since the last 5 years, Lowe’s has seen 4% same store sales growth and 5% annual sales growth.

The company has a solid BBB+ Credit Rating and has rewarded income investors with $24 billion in dividends and share repurchases over the last 5 years.

Source: Lowe’s Strategy Presentation

Revenue Analysis and Share Buybacks

For full year 2019, Lowe’s generated $72.15 billion in sales and earned a net income of $4.28 billion. This implies a 6% net profit margin. Sales grew 1.2% year over year over 2018’s $71.3 billion.

Over the last decade, Lowe’s has grown revenues from $48.82 billion  in 2010 to $72.15 billion in 2019. This represents a compounded annual growth rate (CAGR) of 4%. The company has tailwinds in its favor including the 30 year fixed mortgage rate in the United States having dropped from a high of 5.6% in June 2009 to as low as 3.3% in March 2020.

Other favorable tailwinds include a 50 year low unemployment rate of just 3.5%. As more Americans gain meaningful work, they buy houses and this helps Lowe’s and Home Depot as older homes need to be renovated and maintained.

Trading on the New York Stock Exchange (NSYE), Lowe’s Stock sports a $62 billion market capitalization and pays a decent 2.7% dividend yield. This is 30 basis points higher than the yield on the S&P 500 at 2.4%.

Lowe’s ECommerce Woes

Even though Lowe’s generated $72.15 billion in 2019 sales, it only experienced a 3% sales growth on its ECommerce website, Lowes.com.  As a comparison, ECommerce sales in the United States rose 16.7% in 4th Quarter, 2019 from the same period last year. Lowe’s biggest competitor, Home Depot reported 21% ECommerce sales growth for the fourth quarter 2019.

Lowe’s CEO Marvin Ellison acknowledged that most retailers the size of the company are reporting online sales growth north of 20% while the company is lagging behind, but there is a ray of hope.

The CEO said management knows how to get to market level growth north of 20%. The first step is emigrating Lowes.com from a legacy server to Google Cloud to increase the speed of the site. During Black Friday sales event in 2018, the website crashed frustrating online shoppers.

To address this challenge, management has redesigned its website and added features like one click checkout, price clarity with the cost of each product and expected shipping fees, price comparisons and items similar in nature bundled together among other improvements.

The CEO admitted Lowes.com is “clunky” and not very functional. To address this problem, the company has hired 2000 engineers and plans to spend $500 million annually until through 2021 to improve its ECommerce business.

Growth Outlook

In 4th Quarter, 2019 earnings release, Lowe’s generated $16 billion in sales, and earned a net income of $509 million. This represents a 3.2% net profit margin which in our view is quite weak. This weakness was due to the company taking a $185 million charge due to store closures in Canada and Mexico including inventory liquidation, severance and other costs.

Same store sales grew 2.6% in the United States while sales by ticket sizes greater than $500 grew 3.8% while those transactions between $50 to $500 grew 2.7%. The company is making efforts to sell high valued profitable items including installation and professional services performed by independent contractors.

Attached screenshot also displays positive comparable sales increase in 9 of 13 merchandising departments including decor, lawn & garden, paint and mill work, lumber, tools, hardware and appliances.

Management provided guidance for 2020 and expects  2.5% to 3% total sales growth and diluted earnings per share between $6.38 and $6.58.

Dividend Growth History

Lowe’s is a member of the exclusive S&P 500 Dividend Aristocrats Index. The company has raised dividends for a stunning 53 consecutive years, making it one of a very few group of companies that have raised dividends for greater than half a century.

According to Lowe’s Investor Relations website, the company has grown its dividend from a meager 1 cent per share in 1984 to $2.06 per share in 2019. This represents a stunning 16.5% compounded annual growth rate (CAGR) over 35 years.

Attached chart displays the company’s steep uptrend in dividend growth.

This chart showcases year over year % growth in Lowe’s dividends. We can see during the housing boom years between 2003 and 2007, the company raised dividends between 40% to 50% annually. This rate of growth has slowed to low double digits, but is still very strong.

Measuring the Dividend Payout Ratio

Lets calculate the the dividend payout ratio for Lowe’s Stock. Dividend Payout Ratio measures how much of a company’s free cash flow is paid out in the form of dividends.

Free cash flow is the cash a company generates from daily operating activities minus capital expenditures like investing in new plants or equipment.

Free cash flow is calculated from the statement of cash flows, and is not artificially modified using accounting rules or non-cash expenses like depreciation, amortization, fair value revaluations, etc.

In 2019, Lowe’s generated $4.296 in cash flows from operations and spent $1.484 billion in capital expenditures. What is the free cash flow?

Free Cash Flow = Cash from Operations – Capital Expenditures

Free Cash Flow = $4.296 billion – $1.484 billion

FCF = $2.812 billion

For fiscal 2019, Lowe’s paid out a total $1.618 billion in dividends. So what is the dividend payout ratio?

Dividend Payout Ratio = Total Dividends Paid / Free Cash Flow

Dividend Payout Ratio = $1.618 billion / $2.812 billion

Dividend Payout Ratio = 58%

A dividend payout ratio of 58% is reasonable for a company the size of Lowe’s with huge overhead expenditures such as real estate leasing and inventory costs and over 300,000 employee salaries. We think management has room to increase the dividend in the future, buy back shares and open new stores to achieve growth.

Stock Valuation

Analysts expect Lowe’s to earn $6.30 in earnings per share for 2021. Using the current stock price of $82.80 and dividing in to the expected earnings, we get a forward price to earnings ratio of just 13 times. As a comparison, the S&P 500 currently at about 2,500 price levels trades at 14.9 times forward earnings.

Lowe’s Stock is cheaper than the broader market S&P 500 and also cheaper than its competitor Home Depot, that trades at 17.5 times forward earnings.

Long Term Performance

Lowe’s Stock has risen from as low as $1 in January 1990 to $82 as of April 2020. This represents a compounded annual growth rate of almost 16% which is a phenomenal performance!

During the depths of the great financial crisis, Lowe’s Stock dropped from a high of $35 in February 2007 to as low as $13 in March 2009. This represented a 63% drop from peak to trough and is 7% higher than the drop experienced by the broader market S&P 500. The S&P 500 dropped 56% from peak to trough during this period.

Executive Summary

Here is what we like and don’t like about Lowe’s Stock.

Likes

  • 56 years of growing dividends making this a dividend aristocrat stock.
  • Decent dividend yield of 2.7%, 30 basis points higher than the S&P 500.
  • Dividend payout ratio of just 57.5% which leaves room for future dividend growth, smart acquisitions and share repurchases.
  • Forward price to earnings ratio of just 13 times, which makes this an attractively priced stock.
  • High dividend growth rate of 19.6% annualized over the last 5 years.

Dislikes

  • A recession causing high unemployment or a sharp rise in interest rates due to inflation will pummell this stock as it is highly exposed to the housing market and financial well being of homeowners.
  • Slow sales growth of just 3% on Lowes.com Ecommerce website.
Market Capitalization $62 Billion
Dividend Yield 2.7%
Forward PE Ratio 13 times 2021 earnings
Dividend Growth (5 Year Avg.) 19.6%
Dividend Payout Ratio 57.5%
EPS Growth (5 Year Avg.) 15.2%
2019 Revenues $72.15 Billion
Gross Margin 33%
Net Margin 6%

Lowe’s Stock Ex Dividend Dates

Declared Ex-Date Record Payable Amount Type
0.55 U.S. Currency
0.55 U.S. Currency
Total dividends in 2020: 1.10
0.55 U.S. Currency
0.55 U.S. Currency
0.48 U.S. Currency
0.48 U.S. Currency
Total dividends in 2019: 2.06
0.48 U.S. Currency
0.48 U.S. Currency
0.41 U.S. Currency
0.41 U.S. Currency
Total dividends in 2018: 1.78
0.41 U.S. Currency
0.41 U.S. Currency
0.35 U.S. Currency
0.35 U.S. Currency
Total dividends in 2017: 1.52

Lowe’s Stock Price

To find the most recent price of Lowe’s Stock, head on over to Lowe’s Investor Relations website and click on Stock Information followed by Stock Quote.

 

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