Lowe's Companies Inc. (LOW, Financial), one of the leading home improvement retailers in the United States, reported first quarter 2023 results on May 23. While it beat on the top and bottom lines, investors had plenty of reasons to be concerned about the future. Some catalysts build an unfavorable scenario for Lowe’s, such as a decline in net sales, a high level of debt and cutting the full-year sales forecast. The company has a very remarkable dividend history, but I would argue that negative factors are way too important to ignore just for a dividend.
A beat on earnings and revenue hides bleak forecast
For the three months ended May 5, Lowe's reported non-GAAP earnings per share were $3.67 versus $3.44 expected, and revenue was $22.35 billion versus $21.6 billion expected. Net sales exceeded analysts’ expectations, but they still declined about 6% to $22.35 billion compared to $23.66 billion a year ago. Net income for the period was $2.26 billion, compared with $2.33 billion a year ago. The paradox is that despite a decline in net sales and net income for the quarter, Lowe's reported higher diluted earnings per share at $3.77 compared to $3.51 in the first quarter of fiscal 2022.
Comparable sales decreased by 4.3%, and the company attributed this to lumber deflation, the unfavorable weather and the lower DIY discretionary sales.
Lowe’s chairman, president and CEO stated, "We are updating our full-year outlook to reflect softer-than-expected consumer demand for discretionary purchases... We remain optimistic about the medium-to-long term outlook for home improvement and our ability to continue to grow market share through our Total Home strategy.”
The company revised its outlook downward for full fiscal 2023. The expectations are now for total sales of approximately $87 billion to $89 billion versus $88 billion to $90 billion previously, while adjusted diluted earnings per share of $13.20 to $13.60 are now lower than the previous expected range of $13.60 to $14.0.
An impressive dividend history with a safe payout ratio
Turning to some good news, Lowe's has a remarkable dividend history that is well-suited for income-oriented investors. Lowe's has a forward dividend yield of 2.16%. The dividend history of this stock is very remarkable with 50 consecutive years of dividend increases and a very healthy forward payout ratio of 30.31%
This home improvement retailer has had a 24% dividend CAGR for the last three years. This means that its dividend is growing fast, and this is confirmed by the last annual year’s change of nearly 5%. Investors with a preference for regular dividend payouts that also increase over time have a solid track record history to place Lowe's stock in their list of dividend stocks to monitor.
The balance sheet reveals a major problem
My risk analysis for Lowe’s reveals not one but two major concerns on the balance sheet. Namely, Lowe’s has a high level of debt and negative shareholder equity. During the quarter, Lowe’s continued its Capex increases by repurchasing approximately 10.6 million shares for $2.1 billion and paying $633 million in dividends.
Share repurchases affect financial statements by reducing cash and assets and shrinking shareholders' equity on the balance sheet. Many people think of share repurchases as always being good, but this is not necessarily the case. In this case, I think it was likely an artificial way for the company to increase the diluted earnings per share. It reduced the number of shares outstanding and therefore allocated its net profits to a lower number of shares. This is not bad as a lower number of shares outstanding increases the stock's per-share intrinsic value should a company continue to deliver positive and growing free cash flows. However, what I see as a big red flag for Lowe’s because it has a shareholder deficit, meaning negative shareholder's equity. As of April 2023, Lowe’s had a debt-to-equity ratio of -2.76.
A sustainable shareholder deficit poses the threat of financial bankruptcy and is also very negative for valuation purposes. A company’s net worth equals the total assets minus the total liabilities, and for Lowe’s this difference is negative. Simply put, it means that should Lowe’s have an urgent need to sell off its assets to repay its total liabilities, then it would be impossible to achieve this. This is not a good sign from an investment perspective.
Lowe’s has a solid dividend history, but there are too many negative factors such as shareholder deficit, slower sales and a lower full-year revenue forecast. Taking these together, I do not consider Lowe's shares attractive at this time.