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Summary

  • Shareholders can expect a CAGR of around 13.9% going forward from growth (5%), share repurchases (7.30%) and dividends (1.60%).
  • Lowe's had solid revenue growth in 2013 of 5.7%.
  • The company plans to repurchase $3.4 billion worth of shares in 2014.
  • Lowe's has growth opportunities in California and Mexico.
  • The company may be somewhat overvalued at this time.

Lowe's corporation (NYSE:LOW) operates 1,717 Lowe's home improvement stores across the US, 35 stores in Canada and 8 in Mexico. In addition, the business operates 72 Orchard Supply stores in California and Oregon.

Source: Lowe's Investor Relations Fact Sheet

Current Events

Recent Operating Results: Lowe's had an excellent year in 2013. Strong results were driven by increasing operating efficiency. Lowe's has managed to reduce expenses while increasing prices. Comparable store sales increased 4.8% in 2013, driven by a 3.2% average ticket increase and a 1.6% increase in the number of transactions. Revenue increased by 5.7%, and revenue per share increased by over 14% due to share repurchases.

Lowe's is an incredibly shareholder friendly company, returning over 100% of operating cash flows to shareholders in the form of share repurchases and dividends. In 2013, Lowe's had operating cash flows of $4.1 billion, and returned $4.4 billion to shareholders through repurchases ($3.7 billion) and dividends ($733 million).

Source: 2013 Annual Report, Page 23

Growth Opportunities: Lowe's has a significant growth opportunity in Mexico's $25 billion home improvement market. The business currently has only 8 stores in Mexico. Lowe's also has room to expand in California and the Pacific Northwest through its acquisition of Orchard Hardware. Lowe's plans to open 5 new Orchard Hardware stores in 2014 along with 15 new Lowe's home improvement stores across North America.

As long as the economy continues to improve, Lowe's will deliver solid operating performance. The company's earnings per share decreased from $1.99 in 2006 for three consecutive years, down to a low of $1.21 in 2009. The company did not pass its high earnings mark from 2006 until 2013. Lowe's remains profitable during economic downturns, but growth turns negative. If the economy goes through another downturn, the business will be negatively effected.

Shareholder Return: Lowe's expects 5% sales growth in 2014 from increases in comparable sales of 4% and store count growth of 1%. The business is expected to repurchase $3.4 billion shares in 2014. Shareholders can expect a CAGR of around 13.9% going forward from growth (5%), share repurchases (7.30%) and dividends (1.60%).

Valuation

Lowe's P/E ratio is in line with other businesses in the home improvement industry.

Ticker

Company

P/E

LOW

Lowe's

21.36

HD

Home Depot

20.72

LL

Lumber Liquidators

30.21

Lowe's P/E ratio is somewhat higher than other big box retailers.

Ticker

Company

P/E

LOW

Lowe's

21.36

WAG

Walgreen

24.18

SPLS

Staples

12.08

PETM

PetSmart

16.21

WMT

Wal-Mart

16.33

COST

Costco

25.99

TGT

Target

19.20

BBY

Best Buy

13.22

BBBY

Bed Bath & Beyond

12.75

N/A

Average

17.92

Overall, Lowe's is either fairly-valued or somewhat overvalued compared to its peers in the home improvement industry, and other big box retailers.

Comparison to Other Businesses with 25-Plus Years of Increasing Dividends

Lowe's has increased its dividend for 51 consecutive years. The business has had a fantastic run over the last 25 years with a total return of over 8,800%.

Why it matters: The Dividend Aristocrats (stocks with 25-plus years of rising dividends) have outperformed the S&P 500 over the last 10 years by 2.88 percentage points per year.
Source: S&P 500 Dividend Aristocrats Factsheet, February 28 2014, page 2

Dividend Yield

Lowe's dividend yield of 1.58% ranks it at 85 out of 105 stocks with 25+ years of consecutive dividend increases. Lowe's dividend yield was north of 2% throughout much of 2011 and 2012.

Why it Matters: Stocks with higher dividend yields have historically outperformed stocks with lower dividend yields. The highest-yielding quintile of stocks outperformed the lowest-yielding quintile by 1.76 percentage points per year from 1928 to 2013.
Source: Dividends: A Review of Historical Returns

Payout Ratio

Lowe's payout ratio of 32.70% is lower than the median payout ratio for other stocks with 25-plus years of increasing dividends. Lowe's ranks at 28 out of 105 based on payout ratio. The company's low payout ratio gives it an opportunity to raise dividends substantially in the future.

Why it Matters: High-yield, low-payout ratio stocks outperformed high-yield, high-payout ratio stocks by 8.2 percentage points per year from 1990 to 2006.
Source: High Yield, Low Payout by Barefoot, Patel, & Yao, page 3

Long-Term Growth

Lowe's has grown revenue per share at just under 8% over the last 10 years. The company has grown revenue per share significantly faster than other comparable dividend stocks. Lowe's has the 16th highest growth rate of all 105 stocks with 25-plus years of increasing dividends.

Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4 percentage points per year from 1972 to 2013.
Source: Rising Dividends Fund, Oppenheimer, page 4

Volatility

Lowe's 10-year standard deviation is 31.47%. This ranks it at 65 out of 105 of comparable stocks. The businesses' above average standard deviation is due primarily to being in an industry that is susceptible to recessions.

Why it Matters: The S&P Low Volatility index outperformed the S&P 500 by 2 percentage points per year for the 20-year period ending September 30th, 2011.
Source: Low & Slow Could Win the Race, page 3

Conclusion

Lowe's ranks in the top 40% of stocks with 25-plus years of dividend increases based on the five buy rules from the 8 Rules of Dividend Investing. It will rank higher when its dividend yield increases.

Lowe's is the second largest business in the home improvement industry. The business is susceptible to the US economy as a whole, but remained profitable during the most recent recession. Lowe's is a solid business that has a long history of rewarding shareholders. At present, I believe it is a hold until the price to earnings ratio decreases (and dividend yield increases).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Is Lowe's Still A Solid Dividend Investment?