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Lowe's Stock Analysis

Lowe's Companies, Inc. (LOW), together with its subsidiaries, operates as a home improvement retailer in the United States, Canada, and Mexico. Lowe’s is one of the original dividend aristocrats, has paid uninterrupted dividends on its common stock since 1961 and increased payments to common shareholders every year for 49 years.

The most recent dividend increase was in May 2011, when the Board of Directors approved a 27.30% increase to 14 cents/share. The largest competitor of Lowe’s includes Home Depot (HD).

Over the past decade this dividend growth stock has delivered an annualized total return of 3.40% to its shareholders.

The company has managed to deliver an increase in EPS of 9.10% per year since 2002. Analysts expect Lowe’s to earn $1.64 per share in 2012 and $1.90 per share in 2013. In comparison Lowe’s earned $1.42 /share the company earned in 2011.

The returns on equity have declined from a high of 21% in 2006 to a low of 9.60% in 2010. Right now this indicator is on the rebound, as higher expected earnings would certainly improve returns on equity. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 31.50% per year over the past decade, which is much higher than the growth in EPS.

A 31% growth in distributions translates into the dividend payment doubling almost every two and a half years. If we look at historical data, going as far back as 1980, we see that Lowe’s has actually managed to double its dividend every five years on average.

Over the past decade the dividend payout ratio increased from 5% to 31%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Lowe’s is trading at 16.60 times earnings, yields 2.40% and has a sustainable dividend payout. I recently initiated a position in the stock. I find the stock attractively valued on dips below 22.50.

Full Disclosure: Long LOW

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