Friday, October 15, 2010

Lowe’s Companies (LOW) Dividend Stock Analysis

Lowe's Companies, Inc., together with its subsidiaries, operates as a home improvement retailer in the United States and Canada. This dividend aristocrat has increased distributions for 48 consecutive years. The company was one of original dividend aristocrats that joined the elite dividend index in 1989.

Over the past decade, this dividend stock has delivered an annual total return of 6.90%.

At the same time earnings per share have increased only by 9.80% per year since 2001. Earnings per share have been weak since hitting $1.99 in 2007 as sales have stagnated and same store sales drifted lower. For 2010 analysts estimate an increase in EPS by 16.20% to $1.41. For FY 2011 analysts expect the company to earn $1.67/share, which would represent an increase of 18.40% in comparison with the results in FY 2010.

The company expects to open 40-45 new stores in FY 2010, which would increase it total sales floor by 2 to 3%, and also help it in increasing market share. Lowe’s has kept expanding even during the housing crisis as it opened 153 stores in 2007, 115 in 2008 and 62 in 2009.
While the housing market still appears to be soft, the bottom has likely been hit. This could depress sales at stores like Lowe’s and Home Depot in the near term. A strong demographic factor is the high level of homeownership in the US at 67%, coupled with aging of homes. In addition to that, people are much more likely to participate in do it yourself home renovation projects during a crisis, 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.

The home improvement market, which declined by 8.4% in 2009 is expected to increase by 4.70%/annually until 2014.

At its annual meeting Lowe's Companies, Inc. (LOW) Chairman and CEO Robert A. Niblock told shareholders the company is seeing consumers reordering priorities, being more pragmatic across all aspects of their lives and as a result, increasing their involvement in home improvement projects.

As the year progressed, Niblock said the company saw signs consumers were expanding their spending beyond repair and maintenance into more discretionary products and projects.
"Even in these uncertain economic times affinity for the home remains strong. The 'to-do' list is still on the refrigerator and includes most of the same projects as in the past," said Niblock. "We remain confident in spite of the economic environment, and we work to find the right balance between managing expenses and investing in our business to ensure we continue to deliver the excellent service consumers expect from Lowe's." (source: Lowe’s)

The annual dividend per share has increased by 27.70% on average since 2001. A 28% growth in dividends translates into dividends doubling every two and a half years. Since 1980 the company has managed to double its quarterly dividend every five years on average.

The dividend payout ratio has increased dramatically over the past decade, with the largest increases occurring after 2007. Given the estimated increases in earnings per share over the next few years, the company could easily afford to further increase the dividend payout ratio, by distributing a higher dividend from earnings. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

The return on equity has experienced a dramatic drop since 2007, which was coincidental with the beginning of the housing crisis. As the economy rebounds, and sales and profitability increase, this indicator should return to its normal levels above 15%. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Currently the company trades at a P/E of 16.60, yields 2% and has a dividend payout ratio of 31%. In comparison, Home Depot (HD) trades at a P/E of 17.10 and yields 3.20%. While Home Depot (HD) yields more, the company maintained its distributions flat for 3 whole years, while Lowe’s was increasing their distribution. As a result Home Depot (HD) lost its dividend achiever status in 2008. The stock trades at a yield which is lower than my minimum yield of 2.50%. The stock however has yielded above 2.50% only during 2008-2009 during the financial crisis. Nevertheless I would consider initiating a position in the stock on dips below $18.

Full Disclosure: None

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- Where are the original Dividend Aristocrats now?
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