This is the fourteenth in a series of articles that will take a look at the dividend Kings, companies that have paid an increasing dividend for 50 or more years. So far this series of articles has produced companies that range from small cap to large cap with varying dividend growth rates from 1% to 26%. I really expected all of these companies to be good investments but some of them disappointed me, so on with the study. This article is about Lowe's Companies Inc. (NYSE:LOW) and why it's a total return investment and dividend growth company that has increased its dividend for 53 years making it a dividend King. The company has in the last 43.0 months had a very large above average total return but has a below average yearly dividend at 1.70%. Lowe's Companies, Inc. (Lowe's) is a home improvement retailer. The Company operates approximately 1,860 home improvement and hardware stores, representing approximately 200 million square feet of retail selling space. Lowe's Companies Inc. is being reviewed using The Good Business Portfolio guidelines. Fundamentals of Lowe's Companies Inc. will be looked at in the following topics, The Good Business Portfolio Guidelines, Total Return and Yearly Dividend, Last Quarter's Earnings, Company Business Overview, and Takeaways and Recent Portfolio Changes.
Good Business Portfolio Guidelines
Lowe's Companies Inc. passes 11 of 11 Good Business Portfolio Guidelines. These guidelines are only used to filter companies to be considered in the portfolio. For a complete set of the guidelines, please see my article "The Good Business Portfolio: Update To Guidelines and July 2016 Performance Review" These guidelines provide me with a balanced portfolio of income, defensive, momentum, total return, and growing companies that keeps me ahead of the Dow average.
Lowe's Companies Inc. is a large-cap company with a capitalization of $76.1 billion. The size of Lowe's Companies Inc. cash flow at $4.1 Billion from its building and home improvement materials business, allows it to pay its below average dividend and have cash to add new stores each year for business growth. I most times like to invest in the largest company in a sector because it got there by being better than the others. The Good Business Portfolio has a 8.1% (trim position) position in Home Depot (NYSE:HD) the larger competitor. In this sector the large company would be Home Depot with a capitalization of $175 Billion more than twice the size of LOW, but this allows Lowe's Companies Inc. to be nimble and grow at a faster pace than HD.
Lowe's Companies Inc. has a dividend yield of 1.70% which is below average for the market. The dividend has been increased for 53 years and its dividend is safe. The payout ratio average over the last 5 years is 36% which leaves plenty of cash to pay its dividend and maintain the company's business fast growth. Lowe's Companies Inc. is therefore not a good choice for the dividend income investor, since the dividend is below average, but the total return is fantastic making LOW a great total return growth investment. There is plenty of room for both LOW and HD to prosper as the home ownership segment of the economy continues to grow.
Lowe's Companies Inc. yearly cash flow is good at $4.1 Billion and leaves plenty of cash after paying its low dividend for maintaining and growing its business. This good cash flow also allows the company to have cash available for buying small bolt on companies and opening new stores.
I also require my growth rate going forward to be able to cover my yearly expenses. My dividends provide 3.1% of the portfolio as income and I need 1.9% capital gain in addition for a yearly distribution of 5%. Lowe's Companies Inc. has a 3 year forward CAGR of 16% (from S&P Capital IQ) well above my requirement. Looking back five years $10,000 invested five years ago would now be worth $41,600 today (from S&P Capital IQ). This makes Lowe's Companies Inc. a good choice for the total return investor. For Lowe's Companies Inc. S&P Capital IQ has a three star rating or hold with a target price of $82 with present price being fairly priced at this target. In the long term Lowe's Companies Inc. below average dividend and its growing business in the building and home improvement materials business is a good choice for the total return investor with its well above average total return.
Total Return and Yearly Dividend
The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of The Good Business Portfolio. Lowe's Companies Inc. had much better total return than the Dow baseline in my 43.0 month test period. I chose the 43.0 month test period (starting January 1, 2013 and ending to date) because it includes the great year of 2013, and other years that had fair and bad performance to see how the company does in good and bad markets.
This strongly above average total return of 142.60% for Lowe's Companies Inc. compared to the DOW baseline of 40.67% makes Lowe's Companies Inc. a excellent investment for the total return investor. Lowe's Companies Inc. has done better than the economy over the test period and has a dividend growth rate of 26.14% over the past 10 years. Year to date total return is 8.19% about 2% ahead of the DOW gain so far this year. The dividend is below average at 1.70% and has been increased for 53 years making the company a dividend King. I added a guideline for total return mainly when I am looking at a high yield company as a test to see if the yield and price change really does beat the market. For Lowe's Companies Inc. it shows that it is a great steady company having a large beat over the DOW by 102% for my test period.
DOW's 43.0 month total return baseline is 40.67%
43.0 Month total return
Difference from DOW baseline
Yearly Dividend percentage
Lowe's Companies Inc.
Last Quarter's Earnings
For the last quarter Lowe's Companies Inc. reported earnings on May 18, 2016 that beat expected earnings at $0.87 compared to last year at $0.70 and expected at $0.85. Revenue was a beat by $360 Million and total revenue increased by 7.8% year over year to $15.23 Billion. This was a great report showing the increased revenue and beating the earnings goal. This leaves plenty of cash remaining after paying the $0.35 dividend for business expansion. Earnings for the next quarter will be released mid August and is expected to be at $1.41/share compared to last year at $1.20/share, showing continued strong growth going forward. If I did not already have a full position in Home Depot I would definitely buy Lowe's Companies Inc. As long as the housing sector is growing Lowe's Companies Inc. will do very well.
Company Business Overview
Lowe's Companies, Inc. (Lowe's) is a home improvement retailer. The Company operates approximately 1,860 home improvement and hardware stores, representing approximately 200 million square feet of retail selling space. The Company operates approximately 1,800 stores located across over 50 states in the United States, including approximately 80 Orchard Supply Hardware (Orchard) stores in California and Oregon, as well as approximately 40 stores in Canada and over 10 stores in Mexico.
Takeaways and Recent Portfolio Changes
Lowe's Companies Inc. is a good choice for the dividend growth investor increasing its dividend for 53 years but with a below average dividend yield of 1.70%. Lowe's Companies Inc. strongly beat the total return compared to the Dow average and is a excellent choice for the total return growth investor. The business is growing at 16% CAGR and Lowe's Companies Inc. is in the building and home improvement materials business sector which does alright even in this slow 2% economy. If you don't already have a position in the building and home improvement materials business sector Lowe's Companies Inc. should be worth a position for your total return sector. Lowe's Companies Inc. is one company I am pleased with as a solid long term company but not a buy for The Good Business Portfolio because the portfolio has more than a full position in Home Depot. Home Depot also has a large total return over my test period at 129.45%, a little less than Lowe's Companies Inc. but still great. May the force be with the home remodeling sector.
Sold some Cabela's (NYSE:CAB) covered calls, sold August $55's. If the premium gets to 20% of the sold premium price, I will buy them back with the hope that CAB goes up so I can sell the calls again in the same month for a Double. Almost at the buyback price and ready to make a double.
Sold some covered calls on Harley Davidson (NYSE:HOG), sold August 50's. If the premium gets to 20% of the sold premium price, I will buy them back with the hope that HOG goes up so I can sell the calls again in the same month for a Double. The HOG price is presently above the strike price and I will move the calls up and out if this is true at close to expiration date.
The Good Business Portfolio generally trims a position when it gets above 8% of the portfolio. Below are the four top positions in The Good Business Portfolio. Johnson and Johnson (NYSE:JNJ) is 8.7% of the portfolio, Altria Group Inc. (NYSE:MO) is 8.0% of the portfolio, Home Depot is 8.1% of portfolio, Boeing (NYSE:BA) is 7.8% of the Portfolio, therefore MO, JNJ and HD are now in trim position with Boeing getting close.
Boeing is going to be pressed to 10% of the portfolio because of it being cash positive on individual 787 plane costs, announced in the 2015 fourth quarter earnings call. For BA from the second 2016 earnings call deferred costs increased $33 Million a small amount and I project positive cash flow on the 787 program in the third quarter of possibly $100 Million.
JNJ will be pressed to 9% of the portfolio because it's so defensive in this post Brexit world.
For the total Good Business Portfolio please see my recent article on Good Business Portfolio: 2016 first-quarter earnings and performance for the complete portfolio list and performance. Become a real time follower and you will get each quarters performance after the earnings season is over.
I have written individual articles on AA,CAB, JNJ, EOS, GE, IR, MO, BA, Omega Health Investors (NYSE:OHI) and HD that are in The Good Business Portfolio and other companies being evaluated by the portfolio. If you have an interest please look for them in my list of previous articles.
Of course this is not a recommendation to buy or sell and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account and the opinions on the companies are my own.
Disclosure: I am/we are long CAB, HOG, HD, JNJ, BA, MO, OHI.
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.