As an investor, you'd be hard-pressed to find two companies more similar than Home Depot (HD 0.02%) and Lowe's Companies (LOW -0.03%). Both home improvement retailers have consistently rewarded shareholders with better-than-market returns and growing dividends.
Due to their comparable product offerings and overlapping customers, choosing between Home Depot and Lowe's as an investment can be challenging. So let's dive a little deeper and see which stock is a better buy right now.
Valuation
When looking at two similar companies, it makes sense to start with valuation.
One standard metric for assessing the valuation of mature companies like Home Depot and Lowe's is the price-to-earnings (P/E) ratio, which is calculated by dividing a company's stock price and dividing it by its annual earnings per share. In other words, the P/E ratio provides a relative measure of a company's current market price compared to its earnings.
As of this writing, Home Depot and Lowe's traded at a P/E ratio of 17.8 and 20.1, respectively. These stocks are trading well below their five-year average of 21.8 for Home Depot and 23.1 for Lowe's. So while both home improvement giants are trading at a discount compared to five-year trends, Home Depot wins in this category as the better-valued stock.
HD PE Ratio data by YCharts
Returning capital to shareholders
Ultimately, a company's shareholders want capital returned because it represents a distribution of profits or excess cash, allowing them to recoup their investment. Two primary ways companies can return money to shareholders are dividends and share repurchases.
Dividends allow shareholders to either reinvest their money back into the company or collect cash for themselves. Lowe's and Home Depot exhibit above-average dividend yields of 2.03% and 2.85%, respectively. Both companies have an impressive track record of consistent dividend payments and increases, with Home Depot's dividend increase streak of 14 years and Lowe's dividend increase streak spanning 50 years. Notably, Home Depot paid has paid a dividend since 1987 but paused an increase during the Great Recession.
Stock repurchases provide a tax-efficient way to lower a company's outstanding share count and, in theory, make existing shares more valuable. Over the past five years, Home Depot lowered its outstanding shares from 1.15 billion to 1.01 billion, representing a decrease of 12%. Meanwhile, during the same period, Lowe's reduced its outstanding shares from 825 million to 596 million, equating to a decrease of 28%.
HD Average Basic Shares Outstanding (Quarterly) data by YCharts
It's clear that both companies prioritize returning capital to shareholders, but looking at the consistency of dividend payment increases and more efficient share repurchases, this category goes to Lowe's.
Key financial metrics
For the final category and tiebreaker, let's look at two key financial metrics for the top home improvement retailers: net sales and net debt.
For net sales, the home improvement sector has experienced a decline recently due to the surge in interest rates and a shift in consumer spending toward other sectors, such as travel, as the effects of the pandemic gradually subside.
Home Depot recently reported net sales of $37.2 billion during its fiscal first quarter of 2023, which represented a decline of 4.2% from its fiscal first quarter of 2022. Comparatively, Lowe's generated $22.3 billion for its fiscal first quarter of 2023 compared to $23.7 billion in the year-ago period, equating to a decrease of 5.5%.
Next, let's look at each company's net debt (long-term debt minus cash and cash equivalents), considering the potential impact of increasing interest rates on balance sheets due to heightened interest expenses and future lowering costs.
On the surface, Lowe's appears to have a better net debt than Home Depot, with $33.2 billion compared to $40.9 billion. However, over the past five years, Lowe's net debt has increased 144%, compared to Home Depot's 86%.
Additionally, when you consider Lowe's market capitalization of $122 billion is less than half of Home Depot's $294 billion, the former's net debt starts to raise some eyebrows -- especially when you consider that Lowe's will likely need to take on more debt if it wants to take more of Home Depot's market share.
Considering those key financial metrics, the final category goes to Home Depot.
Is Home Depot or Lowe's the better buy?
While the home improvement sector is seeing higher interest rates weigh down consumers in the short-term, there is a long-term trend favoring Home Depot and Lowe's: America is underbuilt, and its housing inventory is old.
Specifically, a recent report from Realtor.com estimated that America has underbuilt by 6.5 million single-family homes since 2012, and according to the 2020 Census, roughly half of America's housing units are at least 40 years old. Those two indicators show new builds and repairs will be needed for many Americans, regardless of high interest rates.
Home Depot and Lowe's are quality businesses in an important sector of the economy, worthy of any portfolio. Still, between the two, the better stock to buy for investors right now is Home Depot.
