This article originally appeared on The DIV-Net January 26, 2009.
Linked here is a detailed quantitative analysis of Lowe’s Companies, Inc. (LOW). Below are some highlights from the above linked analysis:
Company Description: Lowe’s Companies, Inc. and its subsidiaries operate as a home improvement retailer in the United States and Canada. The company offers a range of products and services for home decoration, maintenance, repair, remodeling, and property maintenance.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
- Avg. High Yield Price
- 20-Year DCF Price
- Avg. P/E Price
- Graham Number
LOW is trading at a discount to all four valuations above. If I exclude the high and low valuations and average the remaining two, LOW is trading at a 39.5% discount. LOW earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
- Rolling 4-yr Div. > 15%
- Dividend Growth Rate
- Years of Div. Growth
- 1-Yr. > 5-Yr Growth
- Payout 15% of avg.
LOW earned three Stars in this section for 1.), 2.) and 3.) above. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (1999-2002, 2000-2003, 2001-2004, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. LOW has paid a cash dividend to shareholders every year since 1961 and has increased its dividend payments for 46 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
- NPV MMA Diff.
- Years to >MMA
LOW earned one Star in this section for 1.) above. The NPV MMA Diff. of the $19,636 is in excess of the $2,500 minimum I look for in a stock that has increased dividends as long as LOW has. If LOW grows its dividend at 20.0% per year, it will take 7 years to equal the cumulative earnings from a MMA yielding an estimated 20-year average rate of 3.45%.
Other: LOW is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. The the home improvement retail industry tends to be very cyclical and relies on economic growth. However, LOW is a strong player with opportunities for growth both domestically and abroad. Aging homes and relatively high home ownership rates are powerful long-term demographic drivers that should help mitigate the continued weakness in residential construction. Consumers viewing their homes as investments will continue to spend money on home improvement projects. Risks include a continued decline in the economy, a large rise in long term interest rates and failure by LOW to execute expansion strategy.
Conclusion: LOW earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a net total of five Stars. This quantitatively ranks LOW as a 5 Star-Strong Buy.
Using my D4L-PreScreen.xls model, I determined the share price could increase to $35.98 before LOW’s NPV MMA Differential fell to the $3,000 that I like to see. At that price the stock would yield 0.92%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the needed $3,000 NPV MMA Differential, the calculated rate is 13.6%. This dividend growth rate is substantially below the 20.0% used in this analysis, thus providing a margin of safety.
LOW has an S&P Quality Ranking of A+ from its consistent historical earnings and dividend growth. It has held up much better than its chief rival Home Depot (HD). I have followed LOW for some time, but have been hesitant to initiate a position in a cyclical company with such a low dividend yield. I calculate LOW’s buy price at $33.11. For additional information, including LOW’s dividend history, please refer to its data page.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I held no position in LOW (0.0% of my Income Portfolio) .
What are your thoughts on LOW?