Will Lowe’s Go Lower or Higher From Here?

Lowe’s Companies, Inc. (NYSE:LOW) surprised many investors by spiking nearly 10% higher in a day last week. It is uncommon for a large-cap company to have such a big move in such a short time.

Lowe’s beat earnings and revenues in Q4, its comparable-store sales rose 5.1% in the quarter, and its SG&A expenses and operating margin saw improvements.

The company’s positive results were bolstered by favourable macro fundamentals, which the company expects to continue in 2017.

It sees growth in the home improvement industry, which will be “supported by continued job gains and income growth, debt service ratios near record lows, strong consumer balance sheets, and improved credit usage.” – Slide 8 of Q4 2016 Earnings call slides

2017 guidance

In fiscal 2017, Lowe’s expects its sales to grow about 5%, its comparable sales to grow about 3.5%, and its operating margin to increase by 1.2%.

These are estimated to help its diluted earnings per share (“EPS”) to grow about 33% to $4.64, and its operating cash flow to grow roughly 5% to $5.9 billion.

Similar to what happened in 2016, Lowe’s expects to generate lots of free cash flow to pay dividends and repurchase shares.

Dividend growth and share repurchases

The world’s second-largest home improvement retailer has an impressive track record of hiking its dividend, specifically, for 54 consecutive years!

Lowe’s five-year dividend growth rate is 20%; its 10-year rate is even higher at nearly 23%! If you received $5,000 of annual dividends from it five years ago, this year, you’d receive $12,500! If you received $5,000 from it 10 years ago, this year, you’d receive a little more than $39,300!

Lowe’s last increased its dividend by 25% in Q3 2016. And it can increase it by about 20% in Q3 seeing that Its payout ratio is sustainable at 36% right now.

One contributing factor to Lowe’s amazing dividend growth history is its share buyback program. Since 2007, Lowe’s has reduced its share count by 43%! A part of that has been fueled by cheap debt.

Home Depot Inc. (NYSE:HD) has also been doing something similar — using cheap debt as a source to reduce its share count. As a result, Home Depot came out with a massive dividend hike of nearly 29% in the first quarter. Its current payout ratio is about 55%.

The large payout ratio difference between the two has to do with the fact that Lowe’s dividend hike is coming up in Q3.

Will Lowe’s Go Lower or Higher From Here?

After the big spike, shares may need to consolidate to gather strength to go higher. However fundamentally, Lowe’s trades at a forward P/E of 17.6 at $81.68, which is reasonable as it’s anticipated to grow its EPS by 15.3-15.7% across 40 analysts.

So, the shares will likely be higher in the future, barring a market crash. In fact, the shares could return north of 12% per year over the long term of at least three to five years.

This standalone article originated from my Seeking Alpha article, which you can access for free here: Lowe’s Soars 10% In A Day. Should You Still Buy?

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Disclosure: At the time of writing, I own shares of Lowe’s.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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