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Lowe's: An Undervalued Dividend King Strongly Positioned In 2021

Mar. 09, 2021 5:04 PM ETLowe's Companies, Inc. (LOW)11 Comments
Kody's Dividends profile picture
Kody's Dividends


  • Lowe's delivered blistering 24.2% YoY revenue growth and 54.4% YoY adjusted diluted EPS in 2020.
  • With home sales expected to rise 10% in 2021 amid continued low interest rates and favorable demographic trends, Lowe's is positioned to benefit once again in 2021.
  • In addition, I estimate that Lowe's shares are trading at a 5% discount to fair value based on my inputs into the DDM and DCF model.
  • Between its 1.5% yield, 8.0-9.0% annual earnings growth, and 0.5% annual valuation multiple expansion, Lowe's is positioned to meet my 10% annual total return requirement over the next decade.

While 2020 was a year that resulted in a hit to the operating results of many businesses, an industry that particularly benefited was home improvement retailers.

As a result of over 5.6 million existing home sales in 2020 (a 5.6% increase from 2019), Lowe's (NYSE:LOW) was able to generate impressive double-digit revenue and adjusted diluted EPS growth during the year.

When taking into consideration that home sales are expected to increase by 10% in 2021 due to a continuation of relatively low interest rates and favorable demographics (i.e. increased Millennial first-time buyers), and that there is a strong correlation between the strength of the housing market and spending on furniture and home improvements, I believe that Lowe's is positioned for yet another strong year in 2021.

Lowe's Dividend Remains Very Safe

Even though Lowe's 1.51% yield is roughly in line with the S&P 500's 1.52% yield, and this indicates that the financial markets view Lowe's dividend as safe for the foreseeable future, I will examine Lowe's FCF and adjusted diluted EPS payout ratios to gauge the safety of Lowe's dividend.

Lowe's generated $11.049 billion in operating cash flow against $1.791 billion in capital expenditures during 2020 (according to data sourced from page 7 of Lowe's Q4 2020 earnings press release), for FCF of $9.258 billion.

When measured against the $1.704 billion in dividends paid out during that time, Lowe's FCF payout ratio equates to 18.4% for 2020.

This represents a marked improvement over the 57.5% FCF payout ratio during 2019 (as per data sourced from page 7 of Lowe's Q4 2020 earnings press release).

Additionally, Lowe's generated $8.86 in adjusted diluted EPS during 2020 (as per page 9 of Lowe's Q4 2020 earnings press release) against $2.30 in dividends/share paid out during that time, for an adjusted diluted EPS payout ratio

This article was written by

Kody's Dividends profile picture
Hi, my name is Kody. I run Kody's Dividends. As you might guess, this is a blog primarily documenting my journey towards financial independence using dividend growth investing as the means to transform the dream of financial independence into a reality.I am forever indebted to this community because it helped me transition from simply being an investor to being a full-time analyst beginning in June 2021. Aside from my five to six articles a week here on Seeking Alpha, I am also a contributor to Dividend Kings and iREIT on Alpha.

Analyst’s Disclosure: I am/we are long LOW. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (11)

Mister Doom profile picture
Dividend king? You picked the wrong one..it’s HD.
@Mister Doom

Kody's Dividends profile picture
@Mister Doom Thanks for the comment. HD and LOW are about equally weighted in my portfolio. I remain bullish on both around these levels.
This thesis assumes 2021 will be similar to 2020 in all aspects. Not sure I agree with that and certainly hope it is not. I could see a 10% increase in revenue and profit for Q1 as it was only partially effected by closings and stay at home. Q2,3, and 4 would be negative to LY by about 20% giving a 2 year comp of about 5 - 7%. Slightly above previous years and trends. Retail monies will be spread to many more activities in 2021. I am still long on LOW.
Kody's Dividends profile picture
@pgmay Thanks for the comment. It's a pleasure to hear from a fellow LOW shareholder.
60% up for me but I will be waiting to see what they actually make this year before I buy more.
Kody's Dividends profile picture
@Cobra6 Thanks for commenting. LOW has been solid for me the past 3 1/2 years.
Buyandhold 2012 profile picture

Lowe's is still a BUY.
Kody's Dividends profile picture
@Buyandhold 2012 Thanks for commenting and I completely agree with your rating on Lowe's at this time.
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