The Tasty Yields Of Lowe's

Aug.26.14 | About: Lowe's Companies, (LOW)

Summary

The share buyback continues strong during Q2 at $1.1 billion.

Lowe's trades at all-time highs following breakout.

The Net Payout Yield is attractive, but declining.

While the market fretted over the reduced guidance by Lowe's Companies (NYSE:LOW) following the Q2 '14 quarterly earnings report, investors focusing on the Net Payout Yield (NPY) were content with the results. The guidance of 3.5% comp sales fell short of prior forecasts causing the stock to initially sell-off. With the strong yields, the stock rebounded from the initial sell-off after the earnings release to end last week at all-time highs around $52.50.

Since the financial crisis that destroyed the housing market, the home improvement stores of Lowe's and Home Depot (NYSE:HD) have had a history of strong share buybacks. In addition, both companies offer decent dividend yields of around 2% that add up to a strong NPY. While investors were focused on the crisis, this home improvement duopoly produced strong free cash flows that provided cash to substantially reduce shares during the last five years.

Now, the question is whether the yields are still tasty with the stocks at all-time highs.

Strong Yields

Most investors are very familiar with the dividend yield, but the less known NPY actually provides a better indication of value in this market where stock buybacks are more welcome. Investors can find out more information about the calculation of the yield and the current top yields here. In the past few years, Lowe's has regularly appeared in the list.

In a quick summary, the NPY is the combination of the current dividend yield and the net buyback yield (total buybacks in the last four quarters divided by the current market cap). In essence, the amount of money returned to shareholders divided by the market cap.

In the case of Lowe's, the current dividend yield is 1.8%. Almost as good as the 2.3% dividend paid by Home Depot. The really exciting number for this home improvement retailer is the net buyback yield component of the NPY. Despite the stock gains, Lowe's repurchased $1.1 billion worth of stock during the last quarter and $2 billion in the 1H14. The current yields for the two home improvement retailers are below:

LOW Net Common Payout Yield (<a href=

LOW Net Common Payout Yield (TTM) data by YCharts

Outstanding Shares

A major contributing factor to the stock gains of Lowe's is the substantial reduction of the outstanding shares over the last five years. According to the data below, the outstanding shares have dropped from 1.45 billion at the start of 2010 to just under 1.0 billion after the Q2 report.

LOW Average Diluted Shares Outstanding (Quarterly) Chart

LOW Average Diluted Shares Outstanding (Quarterly) data by YCharts

Conclusion

With the NPY around 8%, it remains a strong indication that Lowe's will hold up here at all-time highs. The fact that the yield continues to trend lower is a warning sign for investors that further gains followed by a reduction in stock buybacks or even a reduction in the impact of buybacks could trigger a reason to sell the stock. For now though, the yields remain very tasty in a low interest rate environment.

Disclosure: The author is long LOW. The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.