It's been just over six months since my most recent article on Lowe's (NYSE:LOW), and I feel it might be time to take another look at this company to see if it's still a good buy at current prices. At its current price of $67.51, Lowe's is trading near its all-time high of $68.35. The graph below illustrates LOW's amazing growth in share price in recent years.
The rising price per share has caused LOW's dividend yield to drop to only 1.36%, which isn't very attractive for a dividend growth investor like me. In fact, LOW's dividend yield is now at a 5-year low. There is still quite some room to grow the dividend at a higher pace than EPS, as the trailing twelve month payout ratio stands at only 30.8%. If you're, like me, a young investor with several decades of investing ahead of you, a company with a low dividend yield but a high dividend growth rate might prove to be a very profitable investment years from now. The 5-year dividend growth rate for LOW stands at a very respectable 15.9%.
As we can see in the next graph, EPS growth has been quite reasonable in recent years, with 3 and 5 year EPS growth rates of 14.65% and 7.51%, respectively. However, net income hasn't changed much at all in recent years. Furthermore, a 5-year revenue growth rate of only 2.06% means the company isn't growing very fast. For the current fiscal year, revenue is expected to reach $55.97 billion, which would be 4.5% higher than last year.
LOW EPS Diluted (3 Year Growth) data by YCharts
The reason LOW's EPS has been growing at such a high pace can be found when we look at the next graph, which shows the number of shares outstanding and the amounts spent on stock buybacks. Over the past twelve months, the company has bought back $3.73 billion worth of its own shares, which is over 5% of the current $65.68 billion market cap.
LOW Shares Outstanding data by YCharts
With such a large part of earnings growth coming from share buybacks, having a perfect balance sheet is absolutely necessary. The short-term balance sheet looks nice, with a current ratio of 1.22. The quick ratio is a lot lower, at only 0.24, as would be expected with a company like Lowe's, which needs a large amount of inventory.
Lowe's long-term debt has been growing at quite a high pace, as the company spends huge amounts on share repurchases in an effort to keep up the high EPS growth rate. At some point in the future, Lowe's will have to reduce its stock buybacks, as the long-term debt can't continue to grow forever. Interest costs over the past 4 quarters have totaled $513 million, which is 20% of net income.
LOW Total Long Term Debt (Quarterly) data by YCharts
For the current fiscal year, analysts expect LOW's earnings per share to reach $2.67, giving the company a forward p/e ratio of 25.3, which is quite high considering Lowe's 5-year average p/e ratio stands at only 20.3. The forward price to sales ratio stands at 1.17, which is well above the 5-year average of 0.8.
LOW was a great stock to buy half a year ago, when it was trading at much more reasonable valuations. At its current price, the dividend yield is too low to convince me to buy shares. The EPS growth in recent year has been very impressive, but large share repurchases have caused the long-term debt and interest costs to rise at a high pace. I wouldn't recommend buying shares at the current price level.
I am not a registered investment advisor and do not provide specific investment advice. 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. It is up to investors to make the correct decision after necessary research. Investing includes risks, including loss of principal.
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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.