Should you buy this blue chip stock?
The goal of most dividend investors is to allocate their hard-earned capital to constantly growing stocks no matter what the world is going on – companies that have stable operations.
Next to Home deposit, Lowe’s (NYSE: LOW) is a leader in the home improvement retail industry. This bet on home ownership in the history of the American dream has paid off for the brand. And for investors, the stock has increased its dividend for 59 years in a row, making it a dividend king.
Lowe’s is the epitome of what a dividend growth stock should look like, but let’s dig into whether the stock is a buy or a hold right now.
Lowe’s once again outclasses
Lowe’s reported fiscal third quarter revenue of $ 22.92 billion, up 2.7% year-over-year and beating analyst consensus of $ 22.06 billion .
A 2.2% year-over-year increase in same store sales and a slight increase in the number of Lowe’s stores to 1,973 in October 2021 fueled the growth. Inflation and big sales of appliances and flooring drove the average ticket up 9.7%, according to CFO Dave Denton. But during the call for results, he also noted that the gain was offset by a 7.5% drop in transactions due to lower sales of low-cost items and lumber to DIY customers. .
And Lowe’s increased efficiency over the past year has led to a more than 240 basis point increase in its operating margin to 12.2%. Management also aggressively repurchased shares, which explains the staggering 8.2% year-over-year reduction in its weighted average number of shares. Taking into account the company’s higher revenue base, improved margins, and lower share count, it makes sense that Lowe’s was able to increase its non-GAAP diluted earnings per share (EPS) by 37 , 9% to $ 2.73.
And based on Lowe’s recently conducted Pro Pulse survey, 80% of professional contractors expect home improvement demand to continue next year. Given its recent performance and a strong outlook for the industry, analysts expect Lowe’s adjusted EPS to increase 41.2% in fiscal 2021.
In a competitive and constantly changing retail environment, Lowe’s is thriving. Since the average basket of Pro customers is much higher than that of DIY enthusiasts, developing and maintaining a good working relationship with this cohort is critical to the long-term success of the business. Fortunately, management has served Pro customers with Pro sales up 16% year over year in the last quarter.
And the company has positioned itself well in the age of e-commerce, as evidenced by the fact that Lowe’s.com sales have grown by 25%. This comes on top of Lowes.com’s 106% sales growth in the same quarter last year.
Built on a foundation of financial strength
Lowe’s is doing well operationally, but can the same be said of its financial situation? Let’s take a look at the company’s net debt to EBITDA ratio to answer this question.
Lowe’s has net debt of $ 18.56 billion and generated $ 13.61 billion in profit over the past 12 months before interest, taxes, depreciation and amortization (EBITDA). This equates to a net debt to EBITDA ratio of 1.4, which is well within the acceptable range for a retailer of this stature.
And based on analyst estimates for earnings of $ 11.94 per share this year versus a dividend of $ 2.80 per share, Lowe’s payout ratio of 23% leaves plenty of room for the dividend to maintain its streak. decades of growth.
An underrated blue chip
In addition to Lowe’s strong fundamentals, the stock is also reasonably priced.
Lowe’s futures price-to-earnings ratio of about 19 is below the home improvement industry average of 24. With earnings growth also expected to outpace the industry over the next five years, Lowe’s and its 1.3% return are an attractive buy for dividend investors.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.