Numerous macroeconomic factors look unfavorable and point to a chance that the world will soon enter a global recession. Loose monetary policy around the globe until recent months led to artificially high demand for goods and services, which resulted in multidecade-high inflation in many major economies. This has been further exacerbated by Russia's invasion of Ukraine, which caused the price of important commodities -- such as oil, natural gas, and fertilizer -- to spike higher.
But the good news is that no matter what's happening in the world, there are always smart investments that can be made for the long haul. Home improvement retailer and Dividend King Lowe's (LOW 3.56%) looks like it could be an interesting pick for investors.
NYSE: LOW
Key Data Points
The business is built to prosper
With respective home ownership rates of 65.8% and 68.6%, the U.S. and Canada revolve around home ownership. And Lowe's network of almost 2,200 stores in these two countries boasts an approximately 11% share of the $900 billion home improvement retail market. This isn't that far behind the 17% share of the largest home improvement retailer in the world, which is Home Depot (HD 3.10%).
It may seem counterintuitive that in an environment plagued with high inflation and rising interest rates, Lowe's is set to hold up in the near future and over the long haul. After all, the company's fortunes are tied to the housing market.
With housing prices surging 43% in the last two years, many first-time homebuyers are priced out of the market -- under normal circumstances, that is. But millennials (the largest generation that is most likely to buy a house for the first time) are willing to get creative to work around this issue. That's why 84% of the generation is willing to co-buy to enter into the housing market. Co-buying is the pooling of resources with friends, family, or a partner to buy and share a home together.
Nevertheless, it makes sense that demand for Lowe's appliances, tools, paint, home décor, and flooring may slow compared to a stronger economy. But because consumers want to make their houses feel like homes, demand won't just evaporate.
This is why analysts are anticipating the company will deliver modest 0.7% and 1.1% net sales growth this fiscal year and next fiscal year, respectively. Aided by share repurchases, analysts expect Lowe's will still generate a respectable 9.4% annual diluted earnings per share (EPS) growth rate through the next five years.
Image source: Getty Images.
A very secure, market-beating dividend
Lowe's perfectly balances dividend yield with safety. The company's 2.2% dividend yield is moderately higher than the S&P 500's 1.8% yield.
It is expected that Lowe's dividend payout ratio will come in around 27% for this fiscal year. This is a desirable payout ratio for a couple of reasons. First, it provides the company with the funds necessary to pay down debt and open new stores to strengthen the business. Second, it builds a margin of safety into the dividend that is sizable enough to withstand an economic downturn and continue increasing the dividend. Thanks to these factors, I expect Lowe's to build on its 60 consecutive years of dividend growth with low-double-digit annual dividend growth over the medium term.
A wonderful stock on sale
Lowe's is a healthy company with a track record of dividend hikes that easily meets the 50 straight years of dividend growth required to be a Dividend King. Yet the stock is valued at a slight discount relative to the home improvement retail industry.
Lowe's forward price-to-earnings (P/E) ratio of 14.5 is just below the home improvement retail industry average forward P/E ratio of 15.6. Due to its leadership alongside Home Depot in an otherwise fragmented industry and an impeccable reputation of dividend growth, Lowe's is arguably deserving of a higher valuation multiple. Without even considering its undervaluation, the company's 2.2% dividend yield and high-single-digit annual diluted EPS growth make it a buy for investors seeking strong dividend growth and total return potential.
