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Should You Buy This Blue-Chip Dividend Stock?

By Kody Kester – Dec 6, 2021 at 3:50AM

Key Points

  • The retailer beat analysts' revenue and earnings expectations in its fiscal third quarter.
  • A net debt-to-EBITDA ratio of 1.4 implies management is wisely managing its debt levels.
  • The Dividend King offers a reliable payout that should grow faster than the broad market.

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Lowe's operating fundamentals and balance sheet both appear healthy, but does the current valuation justify buying the stock?

The goal for most dividend investors is to allocate their hard-earned capital to stocks that are consistently growing, no matter what's going on in the world -- companies that boast stable businesses.

Alongside Home Depot, Lowe's (LOW 0.56%) is a leader in the home improvement retail sector. This bet on home ownership's part in the story of the American dream has paid off for the retailer. And for investors, the stock has raised its dividend 59 straight years, making it a Dividend King.

Lowe's is the epitome of what a dividend growth stock should look like, but let's dig in to determine whether the stock is a buy or a hold at this time.

Two people shopping at a home improvement store.

Image source: Getty Images.

Lowe's outperforms once again

Lowe's reported $22.92 billion in revenue during the fiscal third quarter, up 2.7% year over year and exceeding the analyst consensus of $22.06 billion.

A 2.2% year-over-year increase in comparable-store sales and a slight increase in Lowe's store count to 1,973 as of Oct. 2021 fueled the growth. Inflation and big-ticket sales of appliances and flooring led to a 9.7% increase in the average ticket, according to CFO Dave Denton. But during the earnings call, he also noted that gain was offset by a 7.5% decline in transactions due to lower sales of small-ticket items and lumber to DIY customers.

And Lowe's increased efficiency over the past year led to a 240-plus basis point expansion to its operating margin to 12.2%. Management has been aggressively repurchasing shares too, which explains the staggering 8.2% year-over-year reduction in its weighted-average share count. When factoring in the company's higher revenue base, improved margins, and lower share count, it makes sense Lowe's was able to grow its non-GAAP diluted earnings per share (EPS) 37.9% to $2.73.

And based on Lowe's recently conducted Pro Pulse Survey, 80% of professional contractors expect home improvement demand to continue into next year. Given its recent performance and the strong outlook for the sector, analysts expect Lowe's adjusted EPS to increase 41.2% in fiscal 2021.

In a competitive and ever-changing retail environment, Lowe's is thriving. Because the average basket for Pro customers is much higher than DIYers, developing and maintaining good working relationships with that cohort is essential to the long-term success of the company. Fortunately, management has been catering to Pro customers with Pro sales up 16% year over year in the latest quarter.

And the company has positioned itself well in the age of e-commerce, as evidenced by the fact Lowe' sales were up 25%. This came on top of the 106% sales growth for in the same quarter last year.

Built on a foundation of financial strength

Lowe's is doing well operationally, but can the same be said of its financial position? Let's dig into the company's net debt-to-EBITDA ratio to answer this question.

Lowe's has $18.56 billion in net debt, and it generated $13.61 billion in trailing-12-month earnings before interest, taxes, depreciation, and amortization (EBITDA). This equates to a net debt-to-EBITDA ratio of 1.4, which is well within the acceptable range for a retailer of this scale.

And based on analysts' estimates for earnings of $11.94 per share this year against a dividend payout of $2.80 per share, Lowe's payout ratio of 23% leaves plenty of room for the dividend to sustain its decades-long growth streak.

An underappreciated blue-chip

On top of Lowe's robust fundamentals, the stock is also reasonably priced.

Lowe's forward price-to-earnings ratio of about 19 comes in below the home improvement retail industry's average of 24. With earnings growth expected to outpace the industry over the next five years as well, Lowe's and its 1.3% yield are an attractive buy for dividend investors.

Kody Kester owns shares of Home Depot and Lowes. The Motley Fool owns shares of and recommends Home Depot. The Motley Fool recommends Lowes. The Motley Fool has a disclosure policy.

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