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Better Buy: The Home Depot, Inc. or Lowe's Companies, Inc.?

By Dan Caplinger - Jan 15, 2016 at 12:22PM

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Both of these home-improvement retailers have done well, but which looks more promising?

The recovery in the housing market since the financial crisis has helped many homeowners return to financial stability, and that has led to an increase in spending on home-related expenses. That's been good for home-improvement retailers Home Depot (HD -2.17%) and Lowe's (LOW -3.29%), both of which saw their shares gain substantial ground in 2015. Yet many investors want to know which stock is a better buy right now. Let's compare Lowe's and Home Depot on a number of metrics to see which one looks more attractive under current conditions.

Valuation
From a share-price perspective, both Lowe's and Home Depot performed well last year. But Home Depot dramatically outperformed Lowe's, picking up 26% versus an 11% gain for Lowe's.

Despite the growth that these stocks have seen, their earnings multiples haven't risen to too large a premium over that of the overall market. On a trailing basis, both Home Depot and Lowe's currently trade at around 22 times earnings. When you take future growth into account, Lowe's valuation becomes slightly more attractive, at about 17.5 times forward estimates compared to 19.5 times for Home Depot. Given that the consensus forecast among those following the stocks is for Lowe's to have a slightly higher growth rate over the next five years than Home Depot, Lowe's arguably has a slight edge on the valuation front.

Dividends
For dividend investors, neither Lowe's nor Home Depot stands out as being extraordinarily rewarding from a yield standpoint. Home Depot's 1.9% yield is stingier than many of its Dow counterparts, and Lowe's weighs in with an even lower 1.6% yield. Lowe's payout ratio of about 32% is lower than Home Depot's 41%, explaining the disparity in yields as merely a difference in capital allocation between the two home-improvement companies.

Even with that stinginess, Lowe's and Home Depot have steadily worked to boost their dividend payments. Lowe's ranks among the elite group of Dividend Aristocrats and has more than half a century of annual dividend increases under its belt. Home Depot has been less mechanical in raising its dividends on an annual basis, but its current dividend stands nearly 6 times higher than it did a decade ago. All in all, shareholders can rely on both companies in their dividend policies, but neither has a clear advantage over the other.

Growth
Fundamentally, both Home Depot and Lowe's have seen good conditions lead to growth. In Home Depot's most recent quarter, the retailer saw its sales growth rise more than 7% from year-ago figures, sending net income up 12%. Thanks to extensive share buybacks, earnings per share rose at an even faster 17% pace, and the company boosted its outlook for full-year sales gains by a full percentage point. Comparable-store sales at its U.S. stores rose 7.3%, and even though the company had to deal with some currency-related headwinds in its international operations, Home Depot was pleased with its progress in capturing a greater share of the overall market and in serving customers better through online and other tools to make purchasing easier.

Lowe's has also seen growth, but it hasn't been able to keep up the pace with Home Depot on the revenue front. In its most recent quarter, Lowe's reported a 5% rise in sales, which helped push net income up by 26% and earnings per share higher by 36%. Comparable-store sales rose 5%. However, despite the impressive bottom-line growth, Lowe's lagged behind Home Depot on operating margins. Investors were also concerned that unlike Home Depot, Lowe's chose not to boost its guidance for the full fiscal year, instead simply reaffirming past guidance.

Home Depot and Lowe's have capitalized on many of the same trends to boost their results in recent years, and in many respects, they still remain quite similar. Even at a slightly lower valuation, Lowe's faces the ongoing challenge of keeping up with its rival's growth. That's one key reason why many give Home Depot the nod over Lowe's in terms of being a better buy.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
HD
$305.21 (-2.17%) $-6.76
Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
LOW
$195.20 (-3.29%) $-6.64

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