Lowe’s Companies, Inc. (NYSE:LOW) has paid a dividend each quarter since going public in 1961. Even more impressive, the company has raised its dividend for 53 consecutive years – a feat achieved by fewer than 15 companies.
Not surprisingly, LOW has a handful of competitive advantages that have enabled it to enjoy meaningful growth. While the stock is not currently in our Top 20 Dividend Stocks portfolio, it’s one that long-term dividend growth investors should keep on their radar.
At the end of September, 56 funds from our database amassed some $3.35 billion worth of Lowe’s shares, unchanged over the quarter. Value investor Edgar Wachenheim of Greenhaven Associates is a big fan of Lowe’s Companies, holding 9.84 million shares, which represented more than 13% of Greenhaven’s 13F portfolio at the end of September.
Let’s take a closer look at the business.
Business Overview
Lowe’s Companies, Inc. (NYSE:LOW) was founded in 1946 and is the world’s second largest home improvement retailer. The company operates over 1,800 home improvement and hardware stores (almost all in the U.S.) and helps homeowners, renters, and professional customers complete a wide array of projects from do-it-yourself to do-it-for-me.
A typical LOW’s store stocks about 36,000 items across virtually every home improvement product category (e.g. lumber, paint, appliances, flooring, tools, cabinets, etc.). Less than 5% of LOW’s sales are made online today, but the company’s strategy is focused on omni-channels sales to capitalize more on the e-commerce trend.
Business Analysis
Home Depot (HD) and LOW dominate the U.S. home improvement market. Each of these companies benefits from strong brand recognition, prominent store locations, a comprehensive line of products and services, economies of scale, and a strong focus on customer service.
Smaller competitors are unable to match the broad assortment of inventory and in-store product presentations that LOW and HD can afford. They also have much less bargaining power with suppliers, making their products less price-competitive. Consumers have few reasons not to head to HD or LOW for their home improvement needs.
LOW has also been improving its competitive positioning by investing more in technology and product presentation. Through the use of technology and helpful in-store displays and service, customers have even fewer reasons to try out competitors’ stores.
Finally, the home improvement market is very large (LOW estimates the U.S. home improvement market was valued at $690 billion in 2014) and slow-changing. Mature industries dominated by several large players are very difficult to crack into, and we believe LOW will continue its dominance for many years to come.
Key Risks
With any brick-and-mortar retailer these days, it’s important to consider the risk (if any) posed by lower-cost e-commerce competitors such as Amazon.com, Inc. (NASDAQ:AMZN). In LOW’s case, we view this risk as low because many of its products are for unique home projects.
Physically going into the store to review paint colors, cabinets, flooring options, and more is critical to getting the project right. We don’t believe that many of LOW’s product categories are vulnerable to online competition and note that LOW’s is investing significantly in its own e-commerce capabilities to further ward off this threat.
Most importantly, LOW’s is sensitive to the housing market. When the job market is weak, consumer spending is down, housing prices have fallen, mortgage rates are high, and housing turnover is low, there is less demand for home maintenance, repair, and upgrade projects. The housing market has been recovering for a number of years now, but the time to buy LOW’s would have been during the depths of the housing crisis.
Aside from macro factors related to the housing market, no major risks jump out at us. The home improvement retail industry is slow-changing, and LOW’s benefits from economies of scale, strong brand recognition, quality merchandise selection, and decent store locations. It’s hard to see the company being disrupted for many years to come.
Dividend Analysis
We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend. LOW’s long-term dividend and fundamental data charts can all be seen by clicking here.
Dividend Safety Score
Our Safety Score answers the question, “Is the current dividend payment safe?” We look at factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
LOW’s dividend Safety Score of 83 suggests that its dividend is safer than 83% of all other dividend stocks in the market.
