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Lowe's Companies, Inc. (LOW) Dividend Stock Analysis

 December 20, 2012 11:11 AM
 


Company Description: Lowe's Companies, Inc. sells retail building materials and supplies, lumber, hardware and appliances through more than 1,700 stores in the U.S. and Canada.

Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price

2. 20-Year DCF Price

3. Avg. P/E Price

4. Graham Number

[Related -Lowe's Companies, Inc. (LOW): Building Value At Lowe's]

LOW is trading at a premium to all four valuations above. The stock is trading at a 14.8% premium to its calculated fair value of $30.02. LOW did not earn any Stars in this section.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:

1. Free Cash Flow Payout

2. Debt To Total Capital

3. Key Metrics

4. Dividend Growth Rate

5. Years of Div. Growth

6. Rolling 4-yr Div. > 15%

LOW earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. LOW earned a Star for having an acceptable score in at least two of the four Key Metrics measured.

[Related -Searching For Value And Finding It In Today’S Market - Sector By Sector]

Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (2003-2006, 2004-2007, 2005-2008, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1961 and has increased its dividend payments for 50 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.

2. Years to > MMA

LOW earned a Star in this section for its NPV MMA Diff. of the $4,489. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as LOW has. If LOW grows its dividend at 17.0% per year, it will take 2 years to equal a MMA yielding an estimated 20-year average rate of 2.42%. LOW earned a check for the Key Metric 'Years to >MMA' since its 2 years is less than the 5 year target.

Memberships and Peers: LOW is a member of the S&P 500, a Dividend Aristocrat, a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company's peer group includes: The Home Depot, Inc. (HD) with a 1.9% yield, KingFisher plc (KGFHY.PK) with a 0.0% yield and Rona Inc. (RON.TO) with a 0.0% yield.

Conclusion: LOW did not earn any Stars in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks LOW as a 4-Star Strong stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $87.75 before LOW's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 50 years of consecutive dividend increases. At that price the stock would yield 0.7%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 8.6%. This dividend growth rate is well below the 17.0% used in this analysis, thus providing a significant margin of safety. LOW has a risk rating of 1.25 which classifies it as a Low risk stock.

As the second-largest home-improvement retailer in the world, LOW enjoys tremendous purchasing power enabling it to provide low prices to its customers. The company is well-managed with a highly automated distribution network. LOW's largest competitor, Home Depot (HD), is playing catch up by aggressively restructuring its distribution network to improve efficiency.

Its strong balance sheet, including a relatively low debt level and impressive free cash flows, has carried LOW through the downturn. The stock is trading below my $30.02 calculated fair value. However, with a yield under 2%, the stock does not meet my minimum threshold, so I will remain on the sidelines for now.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I held no position in LOW (0.0% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.

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