In this video, I’m going to analyze both Home Depot and Lowes stock, ultimately deciding
which I think is the better investment.
My name is Zach and you should leave a like and subscribe to the channel if you enjoy
the video.
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Home Depot and Lowe’s are the duopoly that dominates U.S. Home Improvement Retailers.
Both companies have seen significant earnings growth over the last decade and pay Fast Growing
Dividends.
In fact, Lowe’s has been growing its dividend over 30% in recent increases.
Now, I’m going to analyze each stock individually, then look at the key differences, and at the
end of the video explain which stock I like better.
The Home Depot, ticker symbol HD, was founded in 1978 and now operates 2,316 retail stores
in the US and Canada.
The current stock price is $308.46, which is down over 25% from it’s 52-week high.
This values the company at $317 billion.
The PE ratio based on earnings over the trailing twelve months is 19.57.
Since 2011, the stock price has grown significantly in line with their strong earnings growth.
The non-GAAP earnings per share has grown at a high rate.
Home Depot’s revenue has been growing at a 12% ten-year compound annual growth rate.
Its net income is growing at an even higher rate.
The ten-year CAGR is 20%.
Home Depot is a free cash flow generating machine.
It’s grown at a 14% five year CAGR.
In the past fiscal year, the company generated $13.04 of free cash flow per share.
They use this money to reward their shareholders.
Home Depot has a fast-growing dividend and massive share buybacks.
Over the past 20 years, the company has been repurchasing shares.
This increases the relative value of each share you own, meaning your ownership of the
company's earnings increases.
Share buybacks is one of the best ways companies reward shareholders.
On top of this, Home Depot has been growing its dividend on an annual basis for over 13
consecutive years.
Its 5-year compound annual growth rate is 16.2%.
They recently had a 15.15% increase.
Currently, it pays $1.9 per share every quarter.
The annualized dividend is $7.6, which at current prices results in a 2.46% dividend
yield.
The payout ratio has recently hovered between 42-53%.
This means the company has room to continue growing the dividend but is reliant on future
earnings growth to keep up these high increases.
It should be noted that Home Depot has a large amount of debt, giving the company negative
shareholder equity.
Luckily, this debt is well covered by earnings but could lead to less generous dividends
and buybacks if growth does not continue.
Lowe’s, ticker symbol LOW, was founded in 1921 and now operates 1,971 home improvement
and hardware stores in the United States and Canada.
The current stock price is $199.63, which is down over 25% from its 52-week high.
This values the company at $130 billion.
The PE ratio based on earnings over the trailing twelve months is 16.21.
Similar to Home Depot, the company has seen rapid earnings growth over the last decade.
Annual revenue per share is $138.29, growing at 13% ten-year CAGR.
Net income per share has grown at a 23% ten-year CAGR.
Free cash flow per share has grown at a 20% ten-year CAGR.
In the last fiscal year, the company generated $11.87 of free cash flow per share.
Similar to Home Depot, this fuels massive dividend growth and share repurchases.
Since 2005, Lowe’s has been buying back shares at an even higher rate than Home Depot.
This ranges between 3-10% every year, which is crazy impressive.
The company's dividend is growing at an 18% ten-year CAGR.
Their last increase was 33.3%, which is amazing growth.
On top of this, Lowe’s just announced another 31.25% dividend increase.
The quarterly dividend payout will now be $1.05, giving the company an annualized dividend
of $4.2.
At current prices, the forward dividend yield is 2.1%.
Lowe’s has a very low payout ratio of 23-37% in recent years.
Given their fast-growing earnings, that is why Lowe’s can continually reward shareholders
with huge dividend increases and buybacks.
Similar to Home Depot, the company has large amounts of debt and negative shareholder equity.
It is well covered by earrings, but if growth slows, then the dividends and buybacks would
need to slow down.
In the recent quarter, both Home Depot and Lowes performed better than most retailers.
This bucked the trend of Walmart and Target, which posted bad financials.
Home depot mentioned in their earnings call, that they are continuing to see high spending
on the home.
The company stated that due to increased real estate values, consumers are more willing
to invest in their home.
However, this represents a core risk in their business as well.
If housing prices declined significantly, spending on the home could decrease as well.
This is shown in both Home Depot and Lowe’s earning history.
During 2008-2011, their earnings saw a sizeable decline after the housing market implosion,
leading to a decline in their stock price as well.
On the bright side, both companies sustained their dividend during this time, with Lowe’s
continuing small increases.
Given the recent stock market correction and interest rate hikes, many investors are wondering
if home prices will see a similar decline.
This could lead to decreased consumer spending on the home.
If this happens, I would definitely look to buy the dip on both Home Depot and Lowe’s.
However, it’s unclear whether this will happen as Real Estate is a supply and demand-driven
market.
Construction of new homes would also bring business for these home improvement retailers.
Home Depot and Lowe’s are very similar companies.
So what are their key differences?
Home Depot has more of a professional customer base with over 45% of their business coming
from contractors.
The company has a long history with housing professionals and offering bulk commercial
services.
This is a key advantage for Home Depot.
The company not only has more stores than Lowe’s but has greater revenue and profits
per store.
Lowe’s customer base is more the average homeowner, with 80% of their business being
do-it-yourself buyers.
This leads to slight differences in the services, products, and marketing.
That said, Lowe’s is also focused on gaining market share with professionals so this could
change moving forward.
In conclusion, both Home Depot and Lowe’s are great long-term dividend growth stocks.
Of the two, I find Lowe’s to be the better value in today’s market.
Their earnings are growing at the same rate while trading at a lower pe ratio.
Also, the lower dividend payout ratio means they can grow their dividend and buy back
shares at a higher rate than Home Depot.
I expect that Lowe’s will continue to pay a reliable fast-growing dividend, making it
a great addition to your long-term dividend stock portfolio.
This is just my opinion and be sure to do your own research before making any investment
decisions.
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