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Dividend Aristocrats Part 35: Lowe’s Companies, Inc. (LOW)

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Two home improvement stores dominate the industry in North America:

Lowe’s Companies, Inc. (NYSE:LOW) which has a market cap of $70 billion

– Home Depot Inc (NYSE:HD) which has a market cap of $169 billion

Lowe’s is the second largest company in a well-consolidated industry. Lowe’s is the ‘Pepsi’ to Home Depot’s ‘Coke’.

 dcwcreations/Shutterstock.com

dcwcreations/Shutterstock.com

Among the funds followed by Insider Monkey, 56 reported long positions in Lowe’s as of the end of September, amassing stakes with a total value of $3.35 billion, which represented 5.30% of the company’s outstanding stock.  Edgar Wachenheim’s Greenhaven Associates is the largest shareholder of Lowe’s among the funds we follow, owning around 9.84 million shares.

Large businesses in consolidated markets tend to generate greater margins than more fragmented industries. Lowe’s has a long history of rewarding its shareholders… A very long history.

Lowe’s was founded in 1946 and has paid rising dividends for 53 consecutive years. This makes Lowe’s one of only 17 Dividend Kings – dividend stocks with 50+ years of consecutive dividend increases.

Lowe’s owns and operates over 1,845 home improvement stores in the United States, Canada, and Mexico – the vast majority of company stores are in the United States. In total, Lowe’s employees more than 265,000 people.

In 2009, Lowe’s acquired a 33% stake in Australian home improvement retailer Woolworth’s. Lowe’s owns 33% of Woolworth’s 38 home improvement stores in Australia.

Lowe’s Competitive Advantage

Lowe’s 53 year streak of consecutive dividend increases is evidence of a durable competitive advantage. The company’s competitive advantage comes from its recognizable brand, large scale, and number of locations.

New entrants to the home improvement retail market would be hard-pressed to compete with Lowe’s and Home Depot. Lowe’s established brand lets consumers know they can expect quality products at low prices when shopping at Lowe’s. The sheer quantity of Lowe’s locations in the United States leaves little room for new entrants in this mature market.

Lowe’s has generated over $58 billion in revenue in the last year. The company’s large scale allows it to put pressure on suppliers to reduce costs and drive more customers to its stores. This creates a virtuous improvement cycle that smaller competitors cannot match.

Lowe’s Dividend Growth Rate & Growth Prospects

Lowe’s Companies, Inc. (NYSE:LOW) dividend growth rate over the last decade is a phenomenal 23.5% a year.

Don’t let this number fool you, Lowe’s is not growing at 20%+ a year over a full economic cycle. If it did, it would be worth a trillion dollars in about 16 years. That’s not happening.

The reason Lowe’s dividend has grown so rapidly over the last decade is because the company has hiked its payout ratio from around 10% a year to over 30% a year. Lowe’s has held its payout ratio around 30% since 2010. Shareholders should not expect further rapid dividend growth from payout ratio expansion.

Lowe’s grew its earnings-per-share at a more modest 5.7% a year over the last decade. This is a more reasonable growth rate and more indicative of what shareholders should expect.

The company’s growth comes in fits and starts. Earnings-per-shares have more than doubled from 2009 through expected 2015 results. On the other hand, earnings-per-share were higher in 2004 than they were in 2009 for Lowe’s.

Why is this?

Lowe’s performance is dependent upon the United States housing market specifically, and the overall economy in general. When the economy is in recession, people do not move as often, and spend less on home repairs and maintenance.

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