I’ve been wanting to add one of the two big home improvement retailers to my Portfolio for quite some time. However, the shares of Home Depot (HD) and Lowe’s Companies (LOW) always seem to trade at a premium. Since they both have such a stellar record of earnings and dividend growth, getting either company at a fair valuation can be a challenge.
Choosing between the two companies is not an easy task. HD’s metrics suggest a better company, as it’s got better sales growth and better operating margins, as just a couple of examples. The stock price performances of the two companies over the last year certainly support the idea that HD is performing better.
Over the previous 5 years, LOW and HD stock performed rather similarly, but LOW has struggled compared to HD over the past year, and a stock price performance divergence has occurred. Given this, I see some opportunity for LOW to outperform moving forward if the company can get through the near-term challenges of making investments for long-term growth, working through a CEO succession plan, attracting more professional customers to their stores, and doing a better job of competing for customer traffic and sales with HD, among other things.
LOW currently has a lower P/E ratio and PEG ratio. Also, with LOW being about 1/3 the market cap of HD, and having about 2/3 the amount of sales, I believe it could be easier for LOW to grow in the future – simply a result of being smaller.
So, I was willing to initiate a position in LOW and see where it takes me. Frankly, I think both LOW and HD are excellent choices.
Here are my purchase details…
LOW
On Monday, 5/7/18, I purchased 60 shares at $83.95/sh, for a total of $5,039.00 including commission.
The shares were yielding 1.95% at my purchase price. This is about the average for the S&P 500, but lower than my Portfolio yield of about 2.8%.
This purchase results in an additional $98.40 in annual forward dividend income, or $24.60 per quarterly payment. LOW is expected to increase their dividend within the month, so I hopefully don’t have long to wait in order to get a raise.
Speaking of dividend raises, LOW is a dividend king, having raised its dividend for each of the past 55 years! In addition, the payout ratio is a very reasonable 30% (based on current year earnings estimates), allowing for plenty of room to raise the dividend in the future.
Last year LOW offered up a 17.1% dividend raise. The dividend growth for LOW has been outstanding in recent years, too, with the 1-yr, 3-yr and 5-yr dividend growth rates at 20.6%, 22.8% and 20.4%, respectively. Even the 10-yr dividend growth rate is superb at 19.3%!
LOW is the 41st stock in my Portfolio, and has an initial weighting of ~1.7%, which puts it in the bottom 25% of my holdings, nestled next to HanesBrands (HBI) in terms of dollar value.
I’m excited for my first LOW dividend payment to arrive in August.
Any thoughts on my LOW purchase price? Do you find HD or LOW to be the better investment? I look forward to your comments!
I really like this purchase ED. I have been looking at Lowe’s myself for a while. I would not worry about the relatively low dividend yield, because they have plenty of room to safely increase this dividend further. Also, as you pointed out, their track record of paying and increasing dividends is terrific.
Lowe’s pricing is much better than Home Depot right now. MorningStar has a target price of $90. Most pundits are saying that Lowe’s is at or below its fair market value, and thus I think this is a good time to buy in.
I am a bit light in this consumer sector, and if the price stays this low, I will likely initiate a position in Lowe’s once I have additional capital to invest. Great work!
Thanks, DF. Glad to hear you like Lowe’s here. There seems to be plenty of sources suggesting some undervaluation at this time. Of course, the stock could stay put or head south without some improving company metrics moving forward.
I’d be happy to have you as a fellow shareholder should you eventually initiate a position.
Nice choice – thanks for the recap.
While I think both are good names to consider, I’d lean toward LOW based on current price and the potential dividend growth (as you highlighted, last yeas was quite impressive).
– Mike
Thanks, Mike… happy to share the details. I’m hoping LOW can keep delivering those nice dividend raises over time.
Hi ED, I have watched LOW and HD for years and never wanted to pay the premium price that you mention. My mistake, HD has been a great performer for years. Agree with your assessment that HD has better financials than LOW, but both are good companies. Kind of an indirect play on real estate. Also because of the nature of the product, hard to be overtaken by Amazon. Tom
Hi, Tom. Both HD and LOW have been on a nice long run coming out of the Great Recession. They both aggressively have raised their dividend during that time, too.
It will be interesting to see if their growth can continue or if a change to the economic cycle will derail their impressive growth.
I agree that Amazon is not direct threat to their businesses given the kinds of products and services they sell (e.g. many items that don’t lend themselves to easy shipping due to large size or weight, or having in-store employees to answer questions).
Interesting but, I also have looked at both but haven’t pulled the trigger in favor of other stocks.
Your analysis definitely has merit. I will also look again in June!
Many good opportunities out there in the stock universe, Mr. Robot. I’ll be sure to keep tabs on your activity. Thanks for commenting!
Good luck on the purchases ED. I actually don’t have either in my portfolio and didn’t give either a second look. But, I hope it works out for you.
Anything can happen in the short-term, but long-term I believe I will do well with this purchase. Thanks for your comment, DP!
Hi ED, sounds like a good purchase – 55 years of dividend increases is incredible! Valuation seems reasonable too, especially relative to the past 5 years or so.
I might have to forward this post to Global Gary – could be a good one for his International watchlist!
Cheers, Frankie
Hey Frankie. LOW has an earnings report this coming week, so it will be interesting to get an update from the company. HD reported slower sales growth last week, so it might be hard to expect too much from LOW. We’ll see.
Please have Global Gary look over LOW. I’ll be interested to see if LOW makes his watchlist.
Both are great companies and I’ve considered adding LOW in the past. However, I never really have had the right opportunity to add a position based on the valuation.yield items you cited in the article. I thought you made an interesting appoint about how LOW is working through adding professional customers. I’ve been making a lot of home repairs/upgrades for our new house over the year and always find myself going to HD over LOW. The thing I noticed is that HD seems to be geared towards contractors that also stribe to attract people. LOW seems the other way, more focused on the individual consumer. Both are having success, but they seem different in that regard.
Best of luck with the purchase. Take care!
Bert
I think you nailed it, Bert. LOW has appealed more to the individual consumers than the contractors.
LOW is in a transition right now, so there may be some under-performance in the near-term as they determine their new direction. However, I felt good about the current valuation and thought it was a good time to finally initiate a position in the home improvement industry. Thanks for sharing your thoughts!