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

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

Posted by D4L | Wednesday, July 16, 2008 | | 5 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
  4. Graham Number
LOW is trading at a discount to all four of the metrics above. If I exclude the high and low valuation, and average the remaining two valuations, LOW is trading at an astounding 41.4% discount. A Star is added since LOW is trading at a fair value.

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
  5. Payout 15% of avg.
LOW earned three Stars in this section for 1.), 2.) and 3.) above. LOW has paid a cash dividend to shareholders every year since 1961 and has increased its quarterly cash dividend payments for 25 consecutive years (calendar). The Rolling 4-yr Div. > 15% means that LOW has grown its dividend in excess of 15% in every consecutive 4 year period during the last 10 years. This metric identifies a company that has historically grown its dividend on a high and consistent basis.

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.
  2. Years to >MMA.
LOW earned one Star in this section for 1.) above. I like to see a NPV MMA Diff. of $3,000 for a company that is both an Achiever and an Aristocrat; and $10,000 for a company that is neither. At $13,836, LOW's NPV MMA Diff. is quite strong.

Other: LOW is a member of the S&P 500, is an Achiever and an Aristocrat. The home improvement retail industry is cyclical in nature and is strongly reliant on economic growth. Home ownership rates are near historical highs and the homes are aging. That coupled with an increased net worth of baby boomers make for a powerful long-term driver for LOW's growth. In addition, LOW has favorable growth opportunities in for international expansion in both Canada and Mexico.

Conclusion: LOW earned a Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and one Stars in the Dividend Income vs. MMA section for a net total of 5 Stars. This quantitatively rates LOW as a 5 Star-Strong Buy.

Using my D4L-PreScreen.xls model, I determined the share price could go up to $29 before LOW dropped to the $3,000 NPV MMA Diff. I like to see; or its long-term dividend growth could drop to 15.9% and LOW would still be a buy. As a long-time Home Depot (HD) shareholder, I have not been pleased with HD as a retail operation. I would drive past HD to shop at LOW. This has created a desire in me to own LOW, but the numbers never would work - until now. Barring a significant change in LOW's fundamentals or valuation, I will likely initiate a position in LOW during the month of August.

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 do not own shares of LOW (0.0% of my Income Portfolio).

What are your thoughts on LOW?

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  1. Anonymous // July 16, 2008 at 11:25 AM

    Great analysis - LOW is one of my favorite's right now and I think it has tremendous upside compared to HD.

  2. Anonymous // July 16, 2008 at 12:45 PM

    Do you plan on selling out of HD and into LOW? Or maintaining you poistion at HD? I am also an HD shareholder but feel the same way that LOW may be the better opportunity.

  3. Anonymous // July 16, 2008 at 10:17 PM

    passivefamilyincome: I see a lot of long-term upside for LOW. It may get worse before it gets better.

    Anon: I willcontinue to hold HD until it either cuts its dividend of has a year-over-year flat dividend. I am currently not buying anymore of HD.

    Best Wishes,

  4. Anonymous // July 25, 2008 at 4:31 PM

    I've looked at a number of your analyses and I really like the model and approach that you have set up...

    With the LOW analysis, though, are all the formulas working right? Unlike the other analyses I've looked at, some of the math doesn't seem to be quite right. For EXAMPLE, on the "Dividend Increase %" for 2002 and 2003, I would expect the increase to be 0%. Also for EXAMPLE, the Payout Ratio for 2003 wouldn't be 0%, would it?

    I may be wrong, but based on your other analyses using this model, it just looks like some of the formulas may not be right.

    There are other cells that appear to have some discrepancies but I pointed out ones that are jumped out at me in the first place.

    I apologize if I am wrong, btw, but I just wanted to point it out in case...

    Thanks for writing a wonderful blog and I look forward to your future posts.

  5. Anonymous // July 25, 2008 at 5:20 PM

    Anon: Thanks for bringing these items forward. As for the dividend growth rate, I believe it is correct since the exact dividends were carried to 4 decimals in the formula and were as such:

    2000 $0.03
    2001 $0.035 (+16.7%)
    2002 $0.0375 (+7.1%)
    2003 $0.04 (+6.7%)
    2004 $0.0525 (+31.25%)

    All the extra decimal places happens when a stock splits. I probably should have displayed more precision.

    As for the 2003 payout I think you are correct in assuming something is not right. These are not calculated, but are pulled off an S&P report. It appears to be wrong and I did not catch it. When calculated based on dividends/share and EPS, it is 5%, which appears to be in their normal range. I generally prefer to calculate payout % on dollars and not per share amounts. The diluted share count can sometimes be skewed with exotic share incentive plans and aggressive share repurchases.

    Some of the other numbers may look out of kilter, since LOW is on a fiscal year. I had not rolled share price, payout % and revenue.

    Again, I appreciate you bringing this to my attention.

    Best Wishes,

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