Add some home improvement to your portfolio improvement

We’ve added Lowe’s Companies to the household goods stocks that we regularly review. This chain of hardware and home-improvement superstores is thriving. It’s a buy for long-term share price gains as well as decent and growing dividends.

We’ve added North Carolina-based Lowe’s Companies (NYSE—LOW) to the group of nine household goods stocks we regularly review. Buy Lowe’s for long-term share price gains as well as decent and growing dividends.

Lowe’s operates a chain of 2,119 hardware and home improvement superstores in the United States, Canada and Mexico. Lowe’s acquired Quebec-based Rona Inc. in the first half of last year. This added to its presence in this country, of course.

The renovation trend assists Lowe’s

Lowe’s sells many household goods. These include appliances, paint, flooring, seasonal living products, tools, hardware, lighting products, and so on. Many homeowners are choosing to renovate their existing houses rather than move up to a bigger house. Renovation and home improvement works to the company’s advantage. (‘Love Where You Live’ is the company’s motto.)

Lowe’s earnings have risen each year since the recession that ended in 2009. In the year to January 31, 2017, it’s thought to have earned $3.92 a share (all numbers are in American dollars). This would represent earnings growth of 19.1 per cent, from $3.29 a share, the year before. Based on its fiscal 2017 estimate, the shares trade at a hefty price-to-earnings, or P/E, ratio of 19.6 times. We’ll know the exact numbers when the company reports its fiscal 2017 financial results.

Fast growth justifies higher P/E ratios

In fiscal 2018, which began on February 1, Lowe’s earnings are expected to advance by 15.3 per cent, to $4.52 a share. Based on this estimate, the shares trade at a better P/E ratio of 17 times. Given the company’s fast earnings per share growth, the multiple looks justified.

In addition, Lowe’s comparable-store sales continue to grow. But negative developments are a narrower gross profit margin and operating profit margin. This largely reflected higher labour expenses.

Lowe’s earnings per share rose partly due to fewer shares outstanding. Its share count has fallen each year since fiscal 2006. We expect the company to continue to buy back its own shares. For one thing, it holds cash of $1.083 billion. For another, Lowe’s cash flow grows each year. In addition, its net debt-to-cash-flow ratio is less than 2.9 times. The company’s predictable cash flow makes its debt safe.

Lowe’s has a strong dividend record. It has raised its dividend every year since fiscal 2004, when it paid five cents a share. The company’s current dividend of $1.40 a share is up 28-fold. It yields a decent 1.82 per cent. The reason that the yield is relatively low is because the shares have jumped. They’re up from a recent low of $13 a share in fiscal 2010. We expect Lowe’s to continue to raise its dividend every year.

Buy Lowe’s for long-term share price gains and decent, growing, dividends.


This is an edited version of an article that was originally published for subscribers in the March 3, 2017, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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