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Better Buy: Wal-Mart Stores Inc. vs. Lowe's Companies Inc.

By Demitri Kalogeropoulos - May 20, 2016 at 1:44PM

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Which improving retailer makes the better bet for investors today?

Wal-Mart (WMT 0.19%) and Lowe's (LOW 0.77%) are both making positive strides against the competition lately. Wal-Mart just trounced Target (TGT -1.29%) in the critical metric of customer traffic growth while Lowe's managed a rare Q1 win over Home Depot (HD 1.13%) on sales gains.

But which rebounding retailer makes the better bet for investors right now? Here are a few key statistics to set the stage:

Metric

Wal-Mart

Lowe's

Market cap

$217 billion

$72 billion

Sales growth

N/A

5%

Gross profit margin

25%

35%

Dividend yield

2.9%

1.5%

Price-to-sales

0.4

1.2

Forward price-to-earnings

16x

17x

Sales growth is for stores open at least one year and excludes fuel sales and exchange rate changes. Data sources: Company financial filings and S&P Global Market Intelligence.

Sales and profit growth

The fact that Wal-Mart's stock soared following a 1% Q1 sales uptick tells you a lot about the level of growth investors have come to expect from the retailing titan. After all, comparable-store sales were flat in each of the last three fiscal years (Target's was flat in 2013 but improved to 1% in 2014 and 2% last year). In that context even minor gains are cause for optimism.

Lowe's, meanwhile, isn't growing as quickly as its home improvement rival but its comps have been a healthy 4% to 5% over the last three years. And thanks to a steady housing market rebound, Lowe's is likely to keep this retailing advantage for some time. CEO Robert Niblock told investors late last year that industry conditions such as job and income gains "remain conducive for growth at least through 2017." The latest quarter's 7% comps surge is strong evidence for that thesis.

The comparison is even more stark with regard to profit trends, where Lowe's is trouncing Wal-Mart. Its net income is up 40% in the last five years. Wal-Mart's has actually declined over that period and should fall again in fiscal 2017 as it continues to pour cash into initiatives like e-commerce infrastructure and employee training.

LOW Net Income (TTM) Chart

LOW Net Income (TTM) data by YCharts

Financial efficiency

Wal-Mart still comes out on top in this match-up (and almost all others) when it comes to cash generation. The retailer produced $16 billion of free cash flow last year, which was nearly a record result despite those declining sales and profits. Over the last five years operating cash is up 37%, compared to just a 6% uptick for Lowe's.

LOW Cash from Operations (Annual) Chart

LOW Cash from Operations (Annual) data by YCharts

Few companies in the world can claim Wal-Mart's efficiency level on everything from capital spending to working capital management to supply chain investments. Lowe's, in contrast, has enough trouble closing the significant gap with Home Depot on key efficiency metrics like operating margin and return on invested capital.

Dividends and valuation

Those financial wins help explain why Wal-Mart is the stronger dividend payer. Both companies are dividend aristocrats, having raised their payout for at least 25 consecutive years. But Wal-Mart boasts a much higher yield (2.9% vs. 1.4%) and a heftier commitment: Its payout is nearly 50% of earnings while Lowe's promises just 35% to its shareholders.

Despite the better dividend, Mr. Market is charging a significant premium for Lowe's faster-growing, more profitable business. You'd have to pay up on either an earnings or sales multiple basis to own the home improvement retailer right now. I think that valuation gap is worth it as Lowe's is better positioned to expand over the next few years while fending off e-commerce rivals. But it's a close call. If you're an income investor with a preference for market leaders, Wal-Mart is the more attractive long-term bet.

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Stocks Mentioned

Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$122.60 (0.19%) $0.23
Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
LOW
$176.06 (0.77%) $1.34
The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
HD
$273.19 (1.13%) $3.04
Target Corporation Stock Quote
Target Corporation
TGT
$142.65 (-1.29%) $-1.87

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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