There's a common saying in the personal finance community: Cash is king. The thought process is that available cash can help an individual or a business through an emergency or a tough economy.
Well, if cash is king, cash flow is equally important. And you can bolster the cash flow making its way to your brokerage account by purchasing the highest-quality dividend payers. Thanks to its tremendous half-century-plus dividend growth streak, Lowe's (LOW -0.72%) fits this requirement in my opinion.
But is the stock a buy for dividend growth investors? Let's drill down into Lowe's fundamentals and valuation to answer this question.
Financial results continue to impress
With 1,700 stores serving around 17 million customer transactions each week in the U.S., Lowe's is the second-biggest player in the trillion-dollar North American home improvement retail market. For context, the company's $97.1 billion in net sales in its prior fiscal year followed Home Depot's (HD -0.92%) $157.4 billion in net sales for its previous fiscal year.
Lowe's recorded $22.4 billion in net sales during its fiscal fourth quarter ended Feb. 3, which works out to a 5.2% year-over-year growth rate. The company's total comparable sales contracted 1.5% in the quarter.
This was mostly the result of U.S. comparable transactions dropping 5.5% as do-it-yourself sales cooled. That dip couldn't be offset by 4.8% U.S. comp ticket growth stemming from product inflation and 10% higher sales to professional contractors. An 18% comparable sales decline in Canada due to an unfavorable exchange rate against the U.S. dollar and cheaper lumber prices were also in play for the quarter.
Lowe's non-GAAP (adjusted) diluted earnings per share (EPS) soared 28.1% over the year-ago period to $2.28 during the fiscal fourth quarter. Aside from a higher net sales base, this was driven by an astounding 10.4% reduction in Lowe's diluted share count from $14.1 billion of share repurchases executed last fiscal year.
Moving forward, Lowe's adjusted diluted EPS growth outlook remains solid. Analysts believe that the company's adjusted diluted EPS will compound at 8.8% annually over the next five years. For perspective, that is double the home improvement retail industry average earnings growth forecast of 4.4% for that period.
The above-average dividend should maintain huge growth
Lowe's offers the best of both worlds to its shareholders. The company's 2.1% dividend yield is above the S&P 500 index's average yield of 1.7%. At the same time, Lowe's quarterly dividend per share has skyrocketed more than 550% over the last 10 years to its current mark of $1.05.
LOW Dividend data by YCharts
What could be even better than these two bits of info? Well, Lowe's dividend payout ratio came in at less than 27% in its previous fiscal year. Since this gives the company the funds to invest in growth projects and debt repayment, the dividend is primed to keep growing at a healthy clip in the future.
An attractive valuation for a great business
As a result of the sell-off in the broader markets over the last year, shares of Lowe's shed 10% of their value. That pushed Lowe's forward price-to-earnings (P/E) ratio down to 13.3, which is significantly lower than the home improvement retail industry average forward P/E ratio of 16.1. This has made the stock too cheap to ignore, which is why Lowe's is a buy for dividend growth investors.
