The first Lowe's Companies (NYSE:LOW) location, then called Lowe's North Wilkesboro Hardware, opened in 1921 in North Wilkesboro, North Carolina. The second location did not open until 1949, when the company shifted tactics to focus its sales exclusively on hardware and building materials because management -- correctly -- anticipated an increase in construction following World War II. After the company went public in 1961, Lowe's paid a dividend to shareholders and has increased in its dividend in each of the ensuing 56 years.
Maintaining such a streak puts Lowe's in elite company, even among other Dividend Aristocrats. It's a claim even its larger rival Home Depot (NYSE:HD) cannot share, as it halted its dividend increases during the worst of the housing crisis last decade. And Lowe's dividend growth has certainly been explosive in recent years.
Since 2013, Lowe's has increased its dividend by more than 156%! In 2017, Lowe's raised its quarterly dividend to $0.41, a healthy 17% increase. The home improvement retailer's current dividend yield of 1.75% is slightly below the market's average but, with a long history of increases and more big rises expected in the years to come, Lowe's has certainly grabbed the attention of income investors as a safe, reliable, and growing income stream.
Let's take a closer look at why income investors who hold Lowe's in their portfolios have found one of the best dividend growth companies in the market.
Lowe's business prospects
No look at a company's dividend is complete without an examination of the strength of the business writing the check. In Lowe's third quarter of 2017, sales increased to $16.8 billion, a 6.5% increase year over year, and net earnings rose to $872 million, a 19.3% increase year over year. Most of the sales growth was driven by a 5.8% in total average ticket growth, though customer transaction growth of 0.7% also contributed.
Online sales growth during the quarter also showed strength, increasing 33% year over year. This is an area COO Rick Damron believes will continue to be a catalyst in the quarters ahead as Lowe's continues to invest heavily in its omnichannel capabilities. During the third-quarter conference call, transcribed by S&P Global Market Intelligence, Damron said:
We continue to execute on our strategic priorities, including leveraging our omnichannel capabilities to help customers achieve great project results. ... We are leveraging our investments in Lowes.com, providing an upgraded online shopping experience with enhanced functionality and display for touch screen devices to deliver an optimized mobile experience; improved product and content recommendations; refined search algorithms; optimized assortments informed by digital line reviews; and expanded product views, including video content.
Damron said that Lowe's was not about to stop improving in this area and would soon add new capabilities such as inventory and order status visibility to its online platform.
Other catalysts for Lowe's in 2018 include introducing Stanley Black & Decker's Craftsman products in its stores and streamlining costs in its supply chain that will "significantly" reduce the number of trucks arriving at its distribution centers and stores.
Indeed, the worst that can be said about Lowe's underlying business is that it competes with Home Depot. Home Depot might be one of the best-run businesses in the world and has found a myriad of ways to stay on top of its game. However, when Lowe's is examined out of Home Depot's shadow, one finds a growing and sound business run by shareholder-friendly management. Investors could do a lot worse.
So about that dividend...
Lowe's is projecting its full-year 2017 GAAP earnings to be $4.20 to $4.30 per share. With Lowe's on pace to pay out $1.64 in dividends per share this year, the company's payout ratio is only 38.5% based on the midpoint of its earnings per share (EPS) guidance. That means, even if none of Lowe's efforts to grow come to fruition and earnings are flat next year, Lowe's still has plenty of room to raise its dividend. Again, based on its midpoint EPS guidance of $4.25, Lowe's is also trading at a relatively attractive P/E ratio of 22.1, a decent discount to Home Depot's valuation with a P/E ratio over 26.
With its decent valuation, low payout ratio, long history of dividend hikes, and growth catalysts ahead, Lowe's is an ideal candidate for the income investor's portfolio.
Matthew Cochrane owns shares of Home Depot. The Motley Fool has the following options: short May 2018 $175 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Home Depot and Lowe's. The Motley Fool has a disclosure policy.