Shareholders of Lowe’s Companies Inc. (LOW, Financial) received a dividend increase in excess of 31% late last week. This is the second consecutive year that the dividend raise has been above 30%.
The company also has an incredible dividend growth streak, one of the longest in the market place. What makes the dividend streak so impressive is Lowe's operates in a somewhat cyclical industry, relying on the strength of the economy and home improvement demand to grow.
Just as impressive, the dividend payout ratios are extremely low despite a decade of nearly 20% annual raises. Lowe’s can continue to aggressivly increase its payments to shareholders because its business model provides substantial protection for its dividend.
Let’s dig deeper to see why I believe Lowe’s most recent increase tells investors the dividend is extremly safe.
Company background and results history
Second to just The Home Depot Inc. (HD) in terms of sales, Lowe’s has a commanding position in the home improvement industry. The company has a market capitalization of $128 billion and has generated sales of $95 billion over the last year.
Lowe’s has nearly 2,200 home improvement stores in the U.S. and Canada. The company’s reach is extensive, which has been a boon to business results.
The last decade has seen revenue increase at a compound annual growth rate of 7.4%. Growth has accelerated over the last few years, leading to a nearly 9% annual return since 2017.
Earnings per share has a CAGR of nearly 24% and almost 29% since 2012 and 2017, respectively. Earnings growth has been more pronounced for several reasons. First, Lowe’s has reduced its share count by 440 million shares, or 40%, over the last decade.
This is not the whole story, though, as the net profit has improved 17.1% over the past decade. This figure rises to 23% when considering just the last five years. Lowe’s has enjoyed such growth, in part, because of a lower share count, but mostly due to the net profit margin increasing from 4% in 2012 to 8.8% last year.
It has been in the area of profit margin where the company’s chief rival, Home Depot, has outpaced Lowe’s. Even now, the retailer still trails its peer, but it has seen a greater improvement in net profit margin over the last decade compared to Home Depot. The rivals are now closer in this area then they have been in recent memory, a positive sign for those owning shares of Lowe’s.
Recent results have been very good for the company. Limited supply and higher demand have caused housing prices to surge in many parts of the country. Customers are spending heavily to update their homes, either to maximize return when selling it or to upgrade the quality of the home they plan to maintain.
Additional funds related to government stimulus money have been a tailwind to results. That strength has not shown much sign of leveling off even as the stimulus checks have stopped. Transactions decreased by 13.1% in the most recent quarter, but the average ticket grew 9.3% to nearly $104.
Transactions totaling less than $50 have declined more than 14%, while tickets ranging from $50 to $500 have fallen 8.3%. On the other hand, tickets above $500 were higher by 6.3% as consumers appear to still be willing to make larger purchases.
Same-store sales are expected to range from down 1% to up 1% for 2022. This follows two strong years for the company, where the two-year stack rate was more than 35%. The fact the current year is expected to see very little drop-off in sales and possibly a slight year-over-year increase demonstrates how well Lowe’s resonates with consumers. This bodes well for the company’s future prospects.
Lowe’s is expected to earn $13.55 in 2022, according to analysts surveyed by Yahoo Finance. This would be a 12.5% gain from the prior year.
Recession performance and dividend growth history
The housing crisis that caused the Great Recession meant that homeowners were putting less resources into updating their home. This left Lowe’s, along with the rest of the industry, in a vulnerable position.
Below are the company’s adjusted earnings per share totals before, during and after the last recessionary period:
- 2006 adjusted earnings per share: $1.99
- 2007 adjusted earnings per share: $1.86 (7.0% decrease)
- 2008 adjusted earnings per share: $1.49 (19.9% decrease)
- 2009 adjusted earnings per share: $1.21 (18.8% decrease)
- 2010 adjusted earnings per share: $1.44 (19% increase)
- 2011 adjusted earnings per share: $1.69 (17.4% increase)
- 2012 adjusted earnings per share: $1.76 (4.1% increase)
- 2013 adjusted earnings per share: $2.16 (22.7% increase)
Adjusted earnings per share fell almost 35% from 2007 to 2009. Lowe’s did return to growth in 2010, but it was not until 2013 that the company established a new high for adjusted earnings per share. A reduction in the share count during this period did aid results, but net profit has been in an uptrend over the last decade.
Lowe’s also continued to raise its dividend during the Great Recession, with annualized payments growing more than 24% in total from 2007 to 2009.
Last week, the company announced it is raising its quarterly payment 31.3% to $1.05 per share for the upcoming Aug. 3 distribution. This is well above the 10-year average annual increase of 19.1% and follows last year’s 33.3% dividend raise.
Following the latest raise, Lowe’s dividend growth streak has extended to 60 years.
Shares now have a forward yield of 2.1%, which compares favorably to the average yield of 1.5% for the S&P 500 Index and Lowe’s 10-year average yield of 1.8%. The current forward yield is one of the most generous for the stock in recent memory and it would be the highest since 2011 if averaged for the full year.
Dividend payout ratios and the impact of debt on future dividend growth
You do not establish a dividend growth streak of six decades and have the levels of increases that Lowe’s has without a strong business model that can support such efforts. This is just what Lowe’s has accomplished.
Future high rates of dividend growth are likely in the cards as well given how low the company’s payout ratios are.
Lowe’s distributed $3 in dividends per share last year while earning $12.04 per share for a payout ratio of 25%. Shareholders should see $3.70 of dividends per share this year, implying a projected payout ratio of 27%. Both figures are below the already lower average payout ratio of 33% for the prior decade. Illustrating how well managed the dividend has been, Lowe’s payout ratio spent most of the last 10 years in the low 30% to mid-30% range even as the average dividend raise was in the high teens.
Looking at free cash flow shows a well-covered dividend. In the last year, Lowe’s has paid out $2.1 billion of dividends while generating free cash flow of $6.9 billion for a payout ratio of 30%. This is very close to the average payout ratio of 28% since 2017.
Now let’s examine Lowe’s debt obligations to see what, if any, impact they could have on the company’s ability to continue to grow its dividend.
Interest expense has totaled $897 million over the last year. With total debt of $33.6 billion, Lowe’s has a weighted average interest rate of 2.7%.
To illustrate how high the weighted average interest rate would need to be before dividend payments were in jeopardy, consider the following chart:
Source: Author’s calculations
As shown above, Lowe’s weighted average interest rate would need to exceed 16.9% before free cash flow was not sufficient to cover dividend payments. It would likely take a significant deterioration in business for the company’s dividend to be negatively impacted by debt obligations.
Final thoughts
Lowe’s latest dividend increase was once again above the 30% mark and extended the company’s dividend growth streak to 60 years. This streak speaks to the strength of its business model over a long period.
Despite growing its dividend at an aggressive rate for years, Lowe’s earnings and free cash flow payout ratios are remarkably low. This affords the company’s dividend a very important level of security. Debt obligations are also manageable and unlikely to act as a hurdle for future raises.
Along with a higher-than-usual dividend yield, these factors suggest Lowe’s remains an enticing option for investors looking for safe and secure income.
