There aren't many metrics where home improvement retailer Lowe's (LOW -0.04%) can claim supremacy over its bigger rival, Home Depot (HD 0.94%). But the record of dividend increases is one of them. Lowe's has hiked its dividend annually for 49 consecutive years, putting it in line for Dividend King status in 2024.
Home Depot hasn't been nearly as reliable. Management paused annual increases during the worst of the Great Recession, and so Home Depot's streak sits below 20 years.
Given that history, it's worth considering whether Home Depot might be forced into another pause if a recession develops in the home improvement industry over the next few quarters. Just how safe is this payout?
Home Depot's capital plans differ from its rival
The first thing to note about Home Depot's dividend policy is that it is less conservative than its peers. Management aims to return roughly 55% of earnings to shareholders through dividends, while Lowe's targets a payout ratio of just 35%. That difference helps explain why Home Depot raised its dividend by 10% for 2023, even though earnings rose by 8% in the previous year. Lowe's most recent payout boost was 5%.
However, there seems to be plenty of financial protection for that generous dividend. Home Depot's dividend payments last year were $7.7 billion compared to $14.6 billion of operating cash flow. Through the first half of 2023, dividend outflow was $4.2 billion compared to an ample $12.2 billion of operating cash flow.
What's the worst-case scenario for Home Depot?
Home Depot's sales and annual earnings dove by roughly 40% during the Great Recession, and nothing approaching that magnitude of decline is on the horizon today. The retailer is forecasting sales drops of between 2% and 5% this year while earnings fall by between 7% and 13%.
Executives are bullish about the long-term outlook for the industry, even though 2024 might bring further weakness. There are positive structural factors at work, such as aging housing stock, remote work trends, and an influx of millennials entering the market. Lowe's is similarly optimistic about growth over the long term.
But what if a bigger downturn develops?
HD Payout Ratio data by YCharts.
Home Depot isn't sitting on huge piles of cash, meaning its continued dividend payment depends on those steady cash flows the business generates each quarter. Yet its capital spending requirements are modest, given that the chain already established its store footprint. As a result, the retailer could maintain its payouts through an even sharper industry downturn that pushes cash flow down by 25% or more. Only a deep and prolonged recession would seriously threaten Home Depot's dividend.
Home Depot has a way of always bouncing back
Knowing whether such a difficult selling environment is on the way for the home improvement industry is impossible. But investors do know that Home Depot has a history of thriving through cyclical downturns. It only took a few years following the Great Recession for the chain to set new annual sales and earnings records, and Home Depot never cut its dividend through that tough period.
If a safe payout is your main priority, there are less risky retailing stocks to consider, including Walmart and Lowe's. But Home Depot's industry leadership position, ample cash flow, and high profitability all support the judgment that this dividend will continue climbing along with the chain's annual earnings over the long term.
