Should investors, at this time, consider an investment in Home Depot (HD) or Lowe's (LOW)? The home building sector has been benefiting from the pick-up in housing sales. The article will review a number of the fundamentals to determine if one stock appears to offer a better value than the other.
Dividend and Payout Ratio
Both Home Depot and Lowe's pay a dividend. On March 22, 2013, Lowe's announced a $0.16 quarterly dividend, payable on May 8 for shareholders of record on April 24. Home Depot on February 26 announced a 34% increase in the dividend rate to $0.39 that is payable on March 28 for shareholders of record on March 14.
On March 26, Home Depot closed at $70.05 with a 2.2% dividend yield. Lowe's has closed at $38.22 for a 1.7% dividend yield. Home Depot enjoys the income advantage. Home Depot has historically had a higher payout ratio.
The forward earning yield is a toss up
The growth in shareholder equity favors Lowe's
Price to book value favors Lowe's
Another look at price to book value
Home Depot beats Lowe's on return on assets
The following data was taken from recently press releases by Home Depot and Lowe's.
Home Depot has announced a $17 billion share repurchase program over 3 years. The forgone yearly dividend per share is roughly $3.80, based upon 1.491 billion shares outstanding. Lowe's has announced a $5 billion share repurchase program over two years. This is a forgone yearly dividend of roughly $2.25 per share, based upon 1.112 billion shares outstanding.
Using the March 26, 2013 closing price of $70.05 for Home Depot and its estimated diluted earnings per share of $3.37 generates a price earnings ratio of 20.79x. The March 26, 2013 closing price of $38.22 for Lowe's and its estimated diluted earnings per share of $2.05 generates a price earnings ratio of 18.64x.
Lowe's has a lower price earnings ratio, higher expected sales and comparable store sales growth and a lower price to book value valuation. Home Depot has a higher return on assets and a superior dividend yield. The targeted dividend payout ratio is 50%. This can help investors determine the amount of income to expect from dividends.
Should Lowe' adopt a 50% dividend payout ratio similar to Home Depot, then the dividend could increase to $1.025 per share providing a dividend yield of 2.7%, and that would compare to Home Depot dividend yield of 2.2% with a $1.685 indicated annual dividend based upon 50% of $3.37. The income advantage would belong to Lowe's.
Bottom line both Home Depot and Lowe's have merits worthy of investment consideration. However, given the divergence in the price to book value, Home Depot might be receiving the premium valuation based upon the inclusion in the Dow Jones Industrial Average. Therefore, I am currently reviewing whether to continue holding Home Depot or swap it into Lowe's on a valuation basis.