Lowe's: A Bargain Basement Dividend Aristocrat

Lowe's has an attractive dividend profile and has fallen below its GF Value

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Jul 29, 2022
Summary
  • Lowe's boasts an A-grade dividend profile.
  • Its management remains upbeat over its near-term future, but in all likelihood a downturn is imminent.
  • The stock trades at multi-year lows and its dividend makes it a steal.
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Home improvement giant Lowe’s (LOW, Financial) has seen its stock price take a hit alongside the broader market. It now trades below its GF Value for the first time in quite a while, and its status as a dividend aristocrat adds incredible value to its long-term attractiveness.

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Investors are scampering towards risk-off assets at this time. Crippling inflation and the resultant hikes in interest rates have the equities market in a dump. Therefore, investors should ideally be gravitating towards income stocks such as Lowe’s which are undervalued compared to long-term potential.

Lowe's has raised its dividend ever since going public in 1961 and raised payouts by a whopping 450% in the past decade alone. Hence, despite its near-term business troubles, I believe it is a solid pick for the income.

Dividend stocks are becoming more attractive

With the proliferation of tech in the past decade, growth stocks have taken center stage for investors. Tech growth stocks have yielded above-average returns over the past several years, offering massive incentives for growth-oriented investors. The less risky offerings such as income/dividend stocks took somewhat of a backseat.

A lot of it had to go with the fact dividend stocks traded at mind-boggling valuations as well, offering little incentive for investors to open up a position as yields tanked.

The current stock market downturn has created multiple opportunities for investors to scoop up dividend stocks and reduce their portfolio risk. The S&P 500 just had its worst half in 50 years, and the carnage will likely continue in the upcoming months until the macroeconomic environment stabilizes.

Hence, stocks such as Lowe’s are suddenly more affordable to investors, trading at multi-year lows. Lowe's price metrics are substantially lower than its five-year averages, while it still has a sizeable cash flow balance that should effectively cover its dividend requirements. It has an A-grade dividend profile, growing its payouts over the past 59 years. Moreover, it has a forward divident yield over 2.20% with a payout ratio of close to 25%.

The outlook for Lowe's

Lowe’s has had a solid track record of growing its top and bottom lines in the past decade. It posted a comfortable earnings beat in the past eight quarters until the last quarter.

The current market condition is far from ideal, with rising inflation and interest rates crippling the housing market. Nevertheless, management remains confident over its long-term outlook despite the macroeconomic challenges. CEO Marvin Ellison talked up the company’s prospects at a conference in July, where he discussed how the macro backdrop for home improvement remains remarkably robust. The primary growth drivers remain consistent, which include the age of housing inventory and disposable income.

However, even the most bullish analysts at this time feel an underwhelming year is on the cards for Lowe’s, considering the current market situation. Its operating leverage is healthy enough to sail through the macro headwinds, but a short-term business downturn is all but inevitable. It scores an impressive 10 on 10 on its profitability and growth ranks with GuruFocus.

Takeaway

Lowe’s shares have sold off in the stock market because of the weak macroeconomic environment. Though management remains confident for the future, it’s clear that conditions are likely to be challenging at this time. Long-term shareholders should remain confident in the company’s potential despite its headwinds. More importantly, it is a dividend aristocrat, offering an attractive hedge against the current inflationary pressures.

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure