How Safe Is Lowe's Dividend?

The housing market has rebounded sharply since the financial crisis in 2008, and homeowners have found themselves with the disposable cash necessary to contemplate improvements to their homes. Lowe's Companies (LOW -0.72%) always stands to benefit from increased spending on home improvement, whether it comes directly from do-it-yourself homeowners or indirectly from the professional contractors that many homeowners hire to do needed repairs. Lowe's has a long history of solid, dependable dividends, but with rates on the rise and some calling for a correction in housing, investors are right to ask whether the payout is safe. Let's take a closer look at Lowe's to see whether investors can be confident in its ability to keep its dividend moving higher.

Dividend stats on Lowe's

Data source: Yahoo! Finance. Last increase refers to ex-dividend date.

Dividend yield

Lowe's currently has a dividend yield of 2.1%, which is comfortably close to the overall average for the S&P 500. That makes the home-improvement retailer's payout a healthy one, but not so large as to make anyone nervous that the dividend is unsustainable. Interestingly, Lowe's dividend yield is near the higher end of its typical range, which over the past decade has tended to run between 1% and 2.5%. With the stock's price having remained relatively constant over the past couple of years, rising dividends have helped Lowe's yield to steadily increase to match the market average.

Image source: Lowe's.

Payout ratio

Lowe's currently has a payout ratio of just under 50%, which leaves plenty of room for further dividend growth in the future. Yet that figure is actually fairly high compared to where it has been historically, with levels more typically in the 30% to 40% range recently. After a long rise in earnings from 2010 to 2015, Lowe's bottom line has been more volatile in the past two years, and that has contributed to rising payout ratios. However, investors are optimistic about Lowe's ability to grow in the coming years, and if earnings rise as much as expected, it will take the home improvement retailer's payout ratio back down to levels similar to those seen in the past.

Dividend growth

Lowe's has consistently boosted its payouts to investors for a long time. For 55 consecutive years, Lowe's has made annual increases, and it hasn't been coy about making some of those boosts particularly large. For instance, earlier this year, the company raised its payout by $0.06 to a new quarterly payment of $0.41 per share, marking a 17% rise. Given how many of its peers make only token dividend increases to extend streaks, Lowe's stands out as truly sharing its success with its shareholders.

LOW Dividend data by YCharts.

What's happened with Lowe's lately?

Lowe's has done well lately, but the perennial problem it faces is that it has a hard time matching up to its chief rival in the space. In its most recent quarter, Lowe's said that comparable-store sales growth was up 4.5%, accelerating from 2% growth in the previous quarter. Yet rival Home Depot (HD -0.92%) saw even faster growth, and that translated into Home Depot's boosting its market share in the key professional-contractor segment.

Lowe's expects to pull out all the stops to try to win back that business. Extending store hours should appeal to hard-working professionals looking for convenient access, but reducing its new-store launch target will prevent Lowe's from extending its store network as widely going forward. Even though the retailer still struggles and falls short of matching key Home Depot business metrics like return on invested capital, nothing in Lowe's numbers suggests imminent danger to its dividend.

What to expect from Lowe's

Lowe's has worked hard to build up an enviable dividend history, and the only thing that makes it look bad is its comparison to its main competitor. For dividend investors, Lowe's looks poised to keep its dividend strong well into the future.