Lowe's Companies (LOW 1.88%) isn't expecting much growth this year. The home improvement chain recently issued a cautious outlook for 2023 despite having outperformed management's targets last year.

Pressures on the business include slowing economic growth trends, weaker demand in the housing industry, and ongoing competitive threats from Home Depot (HD 1.69%) and other rivals.

Still, the retailer has navigated through many cyclical downturns in the past. Through it all, Lowe's has paid a steadily increasing dividend, too. With that stellar track record in mind, let's look at whether the stock seems attractive today.

Still No. 2

Lowe's fourth-quarter update in early March extended the main operating story that investors have seen for years with this business. The retailer achieved solid results but still trailed Home Depot across most important metrics.

Comparable-store sales fell 1% through early February, for example, while Home Depot's comps were flat. The industry leader enjoys a larger market share with professional contractors, who haven't pulled back spending quite as much as consumers have.

Lowe's is also in second place when it comes to profitability. Home Depot turned 15.2% of sales into operating income in 2022, while Lowe's comparable metric was 10.5% of sales.

The short-term outlook

The good news is that shareholders are likely to see progress around earnings, even if sales growth stays muted. Lowe's management team sees plenty of room to expand its operating margin toward 14% of sales despite roughly flat comps in 2023.

HD Revenue (TTM) Chart

HD revenue (TTM) data by YCharts. TTM = trailing 12 months.

This forecast syncs up almost exactly with Home Depot's, which is targeting approximately flat comps and an operating margin of 14.5% this year. Lowe's is still seeing much higher sales today than it did before the pandemic, making a modest pullback both unsurprising and immaterial to its wider growth ambitions.

Valuation

Given those similarities, you might think Lowe's stock is a relative steal. Shares are trading for 1.4 times sales here in early 2023 compared with Home Depot's price-to-sales ratio of 1.9.

Some caution is warranted here, though, given Lowe's long track record for underperforming the market leader. Its smaller and less diverse business might be hit harder if a recession develops or if the housing industry stays in a broader slump due to elevated interest rates. And Lowe's stock doesn't look especially cheap since it is valued at 1.3 times annual sales compared with 1.9 times sales for Home Depot.

Still, one major factor that can push a stock's valuation higher is rising profitability. Lowe's has a good chance at achieving this over the next few years, in part by following Home Depot's proven path. Investors who like a mix of growth and income will find a lot to like about this stock, which currently yields 2%.

You can find more-impressive growth stories in the retailing industry, but there aren't many in the industry that can claim over 25 years of steady dividend increases. Lowe's is in that category, while Home Depot is not. Management's conservative approach to capital allocation should serve shareholders just as well over the coming years, too.