Dividends4Life: Stock Analysis: LOW-Lowe's Companies, Inc.

Stock Analysis: LOW-Lowe's Companies, Inc.

Posted by D4L | Tuesday, February 05, 2008 | | 3 comments »

Linked here is a PDF copy of my analysis of Lowe's Companies, Inc. (LOW) (alt.1, alt.2). Below are some highlights from the above linked analysis:

Company Description: Lowe's Companies, Inc. and its subsidiaries operate as a home improvement retailer in the United States and Canada. The company offers a range of products and services for home decoration, maintenance, repair, remodeling, and property maintenance.

Fair Value: I consider 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 and 4.) Graham Number. LOW is trading at a discount in 3 of the 4 valuations listed above - 1.) Avg. High Yield Price, 2.) 20-Year DCF Price and 3.) Avg. P/E Price. If I exclude the high and low valuation, and average the remaining two valuations, LOW is trading at an astounding 55.9% discount. LOW gets a Star for being fairly valued.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description: 1.) Rolling 4-yr Div. > 15%, 2.) Dividend Growth Rate, 3.) Years of Div. Growth, 4.) 1-Yr. > 5-Yr Growth and 5.) Payout 15% of avg. LOW earned 2 of the 4 available Stars in this section - 2.) Dividend Growth Rate and 4.) 1-Yr. > 5-Yr Growth. However, one Star was deducted since LOW has only grown its dividend for 3 consecutive years, leaving a net of 1 Star in this section.

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)? 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. and 2.) Years to >MMA. LOW earned no Stars in this section.

Other: Over the last few years LOW has made significant stides to close the gap with HD. LOW has focused on understanding their customers as noted in this 2004 article "How Lowe's Hammers Home Depot".

Conclusion: LOW earned one Star in the Fair Value section, a net of one Star in the Dividend Analytical Data section, and no Stars in the Dividend Income vs. MMA section for a total of Two Stars, which rates it as a 2 Star-Weak stock.

LOW has got its shots in, scored several knock-downs and stunned the champion; but having flat dividends in 2005, 2003, 2002, 2000 and 1999, LOW just doesn't have the stamina to stand toe-to-toe with HD. In a unanioumous decision, the winner is HD. However, given LOW's performance over the last several years, a rematch is inevitable! Stay tuned...

Disclaimer: As always this is only my opinion and you should not rely on it. 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 do not own shares of LOW.

What are your thoughts on LOW?

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  1. Anonymous // February 5, 2008 at 1:45 PM

    my thought is LOW is better managed company than HD.

    They have better cash-to cash cycles, better logistics distribution costs, better employee morale, tighter expense management and overall better merchandising talent than HD.

    as for valuation based on your number its a better investment.

    but you look at dividends solely so I can see why you would pick HD.

    Either way if housing recovers both will go up, but I think LOW will go up higher than HD.

  2. Anonymous // February 5, 2008 at 2:04 PM

    I've taken a look, and ran the numbers (I used the 15% discount rate used in your calculations and applied it to my calculations) for both LOW and HD and they both appear to trading at their fair values (within 2%) of their current price...So in my opinon neither LOW or HD is a buy but neither are they miss-priced.

    American Dividend Investor,

  3. Anonymous // February 5, 2008 at 8:37 PM

    Anon: LOW is a well-managed company. The valuations I came up with are totally mechanical based on historical information. From a qualitative standpoint you have to estimate what you expect will happen in the future. I didn't go to that step in this analysis since LOW's dividend record was spotty.

    American Dividend Investor: As a dividend investment, I would purchase the shares if I believed the dividends would continue to grow at an acceptable rate. Share price appreciation is not my first priority.

    Thank you both for taking the time to comment.

    Best Wishes,

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