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:
- Avg. High Yield Price
- 20-Year DCF Price
- Avg. P/E Price
- Graham Number
LOW is trading at a discount to only 1.) above. The stock is trading at a slight discount to its calculated fair value of $24.84. LOW earned a Star in this section since it is trading at a fair value.
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:
- Free Cash Flow Payout
- Debt To Total Capital
- Key Metrics
- Dividend Growth Rate
- Years of Div. Growth
- Rolling 4-yr Div. > 15%
LOW earned two Stars in this section for 2.) and 3.) above. 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. 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 (2000-2003, 2001-2004, 2002-2005, 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 47 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)? 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:
- NPV MMA Diff.
- Years to > MMA
LOW earned a Star in this section for its NPV MMA Diff. of the $880. 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 15.0% per year, it will take 9 years to equal a MMA yielding an estimated 20-year average rate of 3.98%.
Other: LOW is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index.
Conclusion: LOW earned one Star in the Fair Value section, earned two 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-Buy.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $28.44 before LOW’s NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 47 years of consecutive dividend increases. At that price the stock would yield 1.23%.
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 13.6%. This dividend growth rate is less than the 15.0% used in this analysis, thus providing a margin of safety. LOW has a risk rating of 1.00 which classifies it as a low risk stock.
LOW is a stock that I have watched for some time. It is a well-managed company with a highly automated distribution network. The short-term weakness in the housing market is countered with LOW’s long-term prospects given the U.S.’s aging homes and relatively high home ownership. LOW has an excellent balance sheet with low debt and strong free cash flows – which more than doubled in 2009. Even though LOW is trading below my $24.84 fair value price, I hesitate to initiate a position due to its low yield. For additional information, including the stock’s dividend history, please refer to its data page.
This article originally appeared on The DIV-Net April 4, 2010.
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