Billionaire William (Bill) Ackman is a successful fund manager and a celebrity on Wall Street. He's famous for operating his hedge fund Pershing Square Holdings, which holds a whopping $10 billion in net assets.
Such a large portfolio hasn't prevented Ackman from placing large bets on his high-conviction ideas. For example, home improvement retailer Lowe's Companies (LOW 1.11%) is 23% of his publicly reported portfolio, worth approximately $2 billion.
So what does Ackman see in Lowe's? Here are three areas where the company shines and why the stock's still worth considering for your portfolio today.
Did someone say dividends?
Lowe's is America's second-largest home improvement retailer and a well-established dividend stock. The company has paid and raised its dividend payout for 61 consecutive years. That means shareholders have gotten pay raises throughout up and down markets, recessions, and the occasional economic crisis.
The dividend yield is 2%, which may not seem like much but has boosted returns substantially over time. Lowe's share price growth has totaled 39,690% over the company's lifetime. However, if you include dividends, those lifetime returns increase to a staggering 63,100%. Don't underestimate the power of dividends!
LOW Dividend data by YCharts.
Despite decades of increasing the payout, Lowe's dividend (a cash expense for the company) seems ironclad. The dividend payout ratio is only 35% of cash flow, with plenty of breathing room to weather a recession and still grow the payout over time.
The growth outlook appears bright
Housing isn't a one-time investment, as most homeowners know; they require maintenance, upgrades, and repairs. According to a Harvard study, Americans spent about $300 billion on home improvement in 2013, and that will approach $600 billion this year. Home improvement seems to grow as materials increase in price and new technologies, like energy-efficient HVAC and smart-home improvements, make their way into older homes.
And the country's second-largest home improvement retailer has ridden the wave higher. Revenue has grown by an average of 6.75% annually over the past decade, and earnings-per-share (EPS) has grown faster, averaging nearly 20% annual growth.
A recession might temporarily slow business as consumers pinch pennies, but the long-term outlook is optimistic. Analysts' estimates call for a 13% average annual EPS growth over the next three to five years.
A quality company at an attractive price
You'll see below that Lowe's stock trades well below its average long-term valuation. After averaging a price-to-earnings ratio (P/E) of 23 since 2013, the stock trades at a forward P/E of just 14. Some of that could be deserved because expected earnings growth is lower. Remember, annual EPS growth was 20% for the past decade but could slow to 13% moving forward.
However, the stock looks cheap compared to the broader market. The S&P 500's long-term growth rate is between 8% and 10% on average, and the index trades at a forward P/E of 18. A company growing faster than the broader market but trading at a cheaper valuation seems like a solid deal.
LOW PE Ratio (Forward) data by YCharts. PE Ratio = price-to-earnings ratio.
Bill Ackman isn't new to the stock; Pershing Square first built its position in 2018 and has held shares since. But given Lowe's strong execution and a reasonable valuation, investors can still reap the rewards of owning this blue chip retailer over the coming years.
