A dividend growth investing strategy can improve an investor's ability to stomach market volatility since it focuses on consistently growing passive income rather than short-term stock fluctuations.
And no group of stocks provides income that grows more reliably than Dividend Kings: These vaunted stocks have delivered at least 50 straight years of dividend increases. Needless to say, their payout histories span very difficult periods, including several recessions, a tech bubble, and even wars.
Home improvement retailer Lowe's (LOW +1.17%) is a Dividend King, and it's an excellent buy for dividend growth investors at this time. Let's take a closer look at the company's recent performance and valuation to understand why.
NYSE: LOW
Key Data Points
Playing second fiddle in a massive industry
Lowe's $123 billion market capitalization is significantly smaller than Home Depot's $323 billion market cap, making it the No. 2 player in the industry. Investors often have a desire for their investments to be the undisputed leader of an industry, but with $900 billion in annual industry sales, the home improvement retail market is so huge there's room for more than one winner.
The company reported $23.5 billion in net sales during the fiscal 2022 third quarter ended Oct. 28, which was up 2.4% over the year-ago period. Comparable sales edged 2.2% higher year over year thanks to improved demand from do-it-yourself (DIY) customers as travel season winded down and children returned to school, according to CEO Marvin Ellison's opening remarks in the recent earnings call. And due to an ongoing effort to court professional contractors, pro sales grew 19% year over year.
The company's non-GAAP (adjusted) diluted earnings per share (EPS) surged 19.8% to $3.27 during the quarter. Tight cost controls and a 10.2% reduction in the company's share count led Lowe's earnings growth to far outpace its top-line growth for the quarter.
The prospects of a recession mean there's potential for a deceleration in Lowe's growth in the near term. But even in this uncertain environment, analysts believe the company can deliver 9.9% annual earnings growth over the next five years.
Image source: Getty Images.
Robust dividend hikes can continue
Lowe's 2.0% dividend yield is meaningfully higher than the S&P 500's 1.6% yield. And if that weren't enough, the growth potential is also quite promising.
The company's dividend payout ratio of 37% gives it plenty of breathing room to invest in future growth opportunities, repay debt, execute share buybacks, and increase dividends. The payout can continue to grow slightly ahead of earnings over the next few years, which should extend Lowe's track record of double-digit percentage dividend growth.
The stock is a steal for value investors
From a fundamentals standpoint, Lowe's is a leading retailer, and the stock is a no-brainer buy for dividend growth investors seeking some value, too.
Lowe's forward price-to-earnings (P/E) ratio of 14.7 is below the industry average of 17.6. For a company with an illustrious dividend track record in a massive market, this is a near bargain-bin valuation in my opinion.
