Both The Home Depot (NYSE:HD) and Lowe's Companies (NYSE:LOW) have benefited from dramatic improvements in the housing market over the past decade. After having to deal with homeowners who were essentially trapped in their current homes as well as reluctance among lenders to make mortgage loans, Home Depot and Lowe's have now been able to tap into new optimism among homeowners and serve both do-it-yourselfers and contractor professionals doing home-improvement work. Yet over the past year, impressive gains in their stock prices have slowed down, and some now wonder whether rising rates will hurt housing and cause a larger pullback for the two companies. Let's compare Home Depot and Lowe's on several important measures to see which one looks like the better buy right now.
Valuation and stock performance
Lowe's and Home Depot have both seen a small portion of their longer-term gains disappear over the past 12 months. Since Nov. 2015, Home Depot has lost 1% of its value, and Lowe's has seen its stock fall 6% over the same period.
Turning to valuation, simple earnings-based methods of comparing the two stocks lead to mixed results. If you focus solely on what the two companies have brought in over the past 12 months, Home Depot's earnings are a bit stronger compared to its share price, and that has produced a trailing earnings multiple of 21. Lowe's comes in a bit higher at 26 times trailing earnings. However, if you look at near-term predictions of what the two companies are likely to earn in the future, the valuation picture reverses. Lowe's has a forward earnings multiple of less than 16, compared to about 18 times forward earnings for Home Depot. Lowe's and Home Depot therefore look relatively similar on a valuation basis as long as you believe the story that those who follow the stock are telling about their near-term future prospects.
At first glance, both Home Depot and Lowe's look like fairly ordinary stocks from a dividend standpoint. They both have yields near the market's overall average, with Home Depot's dividend yield of 2.1% just barely inching past Lowe's figure of just under 2%. Payout ratios of between 35% and 45% show that both companies have room for future dividend increases if they so choose.
Dividend growth has also been a priority for both Lowe's and Home Depot. Lowe's is a Dividend Aristocrat, boasting a 54-year history of boosting its dividend every single year. Home Depot can't match that track record, as it chose not to increase its payout during the immediate aftermath of the 2008 financial crisis. However, dividend increases of 17% for Home Depot and 25% for Lowe's earlier this year show that the two companies are trying to reward shareholders more strongly. Again, both home-improvement retail giants look similar when it comes to dividends.
Growth and fundamental prospects
Both Home Depot and Lowe's have posted solid earnings recently. In its most recent quarter, Home Depot posted comparable-store sales growth of 5.9%, led largely by average spending per customer that rose at more than a 3% pace from the year-ago quarter. Customer traffic remained sluggish, with 2% growth being about half what it has seen in recent years. Thanks to strong returns on invested capital and a big jump in operating cash flow, Home Depot decided to boost its stock buyback target by an extra $2 billion, responding in part to the slowdown in its share-price appreciation. Looking ahead, Home Depot still expects 5% higher comparable sales for the full year, despite facing a tough comparison in the holiday quarter.
At Lowe's, recent performance has lagged somewhat, but the company remains optimistic about its future. Comps grew by 3%, and that's consistent with a 3% to 4% prediction for the full year that is slightly slower than Home Depot's expectations. Operating margin remained in the high-single-digit percentages at Lowe's, badly lagging Home Depot's low-to-mid-teens figure. One area where Lowe's is trying to catch up is in its store network, where continuing expansion requires some additional commitment to capital expenditures. Yet the winding down of its Hydrox joint venture, which operates hardware and home improvement stores in Australia and required a $290 million non-cash charge during the most recent quarter, shows some of the challenges with Lowe's international strategy.
Home Depot has traditionally outpaced Lowe's in fundamental business performance, and with few differences in dividend or valuation, Home Depot remains the more attractive stock right now. With some doubts about the sustainability of housing's boom, it makes sense to stick with the tried-and-true pick in investing in this industry.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.