For income investors, the objective is to build a portfolio filled with companies that have proved themselves resilient enough to raise their dividends consistently no matter the business conditions.
One stock that forms the foundation of my dividend growth portfolio is Lowe's Companies (LOW -0.04%). Few businesses can lay claim to as illustrious of a dividend growth streak as the home improvement retailer, which has boosted its payouts to shareholders for 61 consecutive years.
The company should be fine in the long run
At the surface level, it would be appropriate to characterize results for the fiscal first quarter as discouraging, in my opinion. For the period that ended May 5, the home improvement retailer's net sales fell by 5.5% year over year to $22.3 billion. But a deeper dive into these results would offer reasons to think that they aren't so disappointing after all.
| Metric | Q1 2022 | Q1 2023 |
|---|---|---|
| Comparable sales growth (YOY) | (4%) | (4.3%) |
| Net margin | 9.9% | 9.8% |
| Diluted share count | 662 million | 597 million |
Data source: Lowe's. YOY = year over year.
The retailer's comparable average ticket (i.e., average spending per transaction) dipped by 0.3% during the fiscal first quarter. This was the result of a plunge in lumber prices due to less homebuilding activity, which cut into demand for the commodity. Soaring interest rates, shrinking discretionary incomes, and a late spring also contributed to a 4% year-over-year decline in the company's comparable transactions.
Lowe's non-GAAP (adjusted) diluted earnings per share (EPS) grew by 4.6% year over year to $3.67 for its fiscal first quarter. Higher net interest expenses caused its non-GAAP net margin to contract by 10 basis points in the quarter. But its decreased net sales base and profitability were offset by a significant reduction in its diluted share count due to substantial stock buybacks. That explains how the company's adjusted diluted EPS rose even as net sales dropped.
When interest rates eventually begin to fall, homebuilding activity should once again pick back up. This is why analysts believe that the adjusted diluted EPS for Lowe's will rise by 6.7% annually over the next five years, beginning with a return to earnings growth in its next fiscal year. For context, that's far more than the home improvement retail industry's average annual earnings growth outlook of 3.7%.
Image source: Getty Images.
A market-topping dividend with growth potential
Lowe's offers a 2.1% dividend yield at its current share price, which is meaningfully greater than the S&P 500 index's 1.6% yield. And not only does the company offer above-average starting income to its shareholders, but its payout growth has also been excellent. Management has boosted the quarterly dividend by nearly 130% in the past five years alone.
LOW Dividend data by YCharts.
And the company is positioned to keep delivering that kind of solid dividend growth. It is projected that the stock's dividend payout ratio will be around 32% this fiscal year. That leaves Lowe's with enough capital to further expand its business, repay debt, and repurchase shares.
Lowe's is a great value
Lowe's shares have performed reasonably well over the past year -- up 4%. And as a bonus, the stock seems to be quite undervalued. Its forward price-to-earnings ratio of 13.9 is much lower than the home improvement retail industry's average of 16.8. Considering the above-average growth prospects and legendary status of Lowe's as a dividend payer, the stock arguably deserves to be trading at a premium valuation to its peers. This is precisely why I believe that Lowe's is a buy for dividend growth investors.
