Lowe’s Companies (NYSE: LOW) is a Fortune 50 company and the world’s second-largest home improvement retailer. The company operates nearly 2,200 home improvement and hardware stores, comprising approximately more than 200 million square feet of retail selling space.
Lowe’s is well known amongst income-oriented investors for its Dividend King status. The term refers to the companies that have raised their dividends annually for more than 50 years in a row.
Lowe’s has hiked its dividend per share for 59 consecutive years, with increases even accelerating as of recently.
In my view, Lowe's is a reliable, well-run company that should continue posting solid results going forward. However, the stock's prolonged rally over the past few years resulted in a valuation expansion.
Hence, the stock does not currently trade at levels that are attractive enough for me to allocate capital. I am neutral on the stock.
Latest Results
Lowe’s Q3 2021 results were rather robust. Revenues came in at $22.9 billion, 2.73% higher year-over-year. Comparable sales grew 2.2%, with U.S. Home Improvement comparable sales growing 2.6% versus the comparable period last year.
Net income was $1.9 billion, a substantial increase from $692 million in Q3 2020. Excluding charges in the prior-year period related to the extinguishment of debt, Q3's diluted EPS of $2.73 increased 38% from adjusted diluted EPS of $1.98 last year. EPS growth was also assisted by the company's aggressive stock buybacks.
The company bought back 13.7 million shares during the quarter for $2.9 billion. Still, Lowe's retained a strong liquidity position with $6.1 billion of cash and cash equivalents. The company expects its FY 2021 share repurchases to amount to $12 billion, and sales to land around $95 billion, suggesting a 33% comparable sales growth on a two-year basis.
In December, the company reaffirmed its FY 2021 guidance, while also providing an outlook for FY 2022. Specifically, FY 2022 sales are expected to be between $94 billion to $97 billion, gross margin rates are expected to be flat year-over-year, and diluted earnings per share are projected to land between $12.25 to $13.00. This includes the company repurchasing another $12 billion worth of stock in 2022.
Valuation
Based on management's guidance for FY 2022, the company is essentially trading at around 20.5 times its next year's net income.
This multiple seems somewhat rich considering that the company's results have already been boosted by the home-improvement tailwinds resulting from COVID-19.
Sales are expected to be flat year-over-year, after all. I believe Lowe's is more fairly valued at a forward P/E of around 16, at which the company has often traded over the past decade.
In my view, investors' margin of safety would be much more substantial there. Further, despite the company's latest impressive DPS hike by 33%, the stock yields just 1.16% at its current levels.
That said, the $12 billion in stock buybacks next year suggests a buyback yield of around 7%, which is admittedly a strong tangible capital return for investors.
Wall Street’s Take
Turning to Wall Street, Lowe's has a Strong Buy consensus rating, based on 13 Buys and four Holds assigned in the past three months. At $281.12, the average Lowe's price target suggests 8.3% upside potential.
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Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
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