Hot inflation numbers in recent months, the prospect of upcoming interest rate hikes, and fears of a housing slowdown have punished the home improvement sector. For instance, Dividend King Lowe's Companies (LOW -0.03%) is down 33% so far this year -- worse than the S&P 500 index's 24% drop.
But the recent 31.3% hike in Lowe's quarterly dividend per share to $1.05 suggests that management is confident about the company's future. Let's dig into Lowe's fundamentals to learn why management is so optimistic.
Better profitability, share buybacks power earnings higher
Lowe's report $23.7 billion in net sales during the first quarter ended April 29, which was a 3.1% decline over the year-ago period. The home improvement retailer came up just shy of the $23.7 billion average analyst net sales estimate for the quarter. But Lowe's has still surpassed the analyst net sales consensus in eight out of the last 10 quarters.
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What was behind Lowe's net sales decline? The company's comparable sales dropped 4% year over year in the first quarter but were still up 19.7% on a two-year basis. Due to the American Rescue Plan Act's economic stimulus that bolstered the economy in the year-ago period, Lowe's faced an exceptionally high bar to clear in the first quarter. The company's management team estimates that the economic stimulus was responsible for a 300-basis point lift to the business in the prior year's quarter.
Thanks to its new products and continued improvements in its website called Lowes4Pros.com, Lowe's professional contractor sales surged 20% higher over the year-ago period. This led the company's comparable average ticket to grow 9.1% year over year during the quarter. But because do-it-yourself customers accounted for 75% of net sales in the quarter and there was a late start to spring, Lowe's comparable transaction count dropped 13.1% over the year-ago period.
The company recorded $3.51 in diluted earnings per share (EPS), which represents a 9.3% year-over-year growth rate. Lowe's comfortably topped the average analyst forecast of $3.22 for the quarter. The first quarter was the 12th straight quarter that the company has done so.
Also, with exceptional cost management, Lowe's saw its net margin edge 40 basis points higher over the year-ago period to 9.9% in the first quarter. And the company's share repurchases prompted the weighted-average diluted share count to fall 8.1% year over year to 662 million during the quarter.
The safest dividend is one just significantly raised
Massive dividend hikes are almost always an indication that a company is thriving. And that seems to be the case with Lowe's. Because more millennials are expected to enter the housing market in the years ahead and there is a shortage of housing, the outlook should remain promising for Lowe's.
Despite elevated housing prices and rising interest rates, analysts believe the company will deliver 15.1% annual earnings growth through the next five years. And with the stock's dividend payout ratio projected to be 27.3% this fiscal year (even with two quarters of the much higher $1.05 dividend per share), the dividend appears to be very secure.
This is why I'm confident that Lowe's has many years of low-double-digit dividend growth left in the tank. Paired with a 2.4% dividend yield, this makes the stock an interesting income and growth stock hybrid.
A blue chip bargain
Lowe's seems also to be trading at an attractive valuation. This is because the stock's forward price-to-earnings (P/E) ratio of 12.7 is well below the S&P 500's forward multiple of 15.8.
And even adjusting for the cyclical nature of corporate earnings with the Shiller P/E ratio, Lowe's looks like a solid buy right now. The stock's current Shiller P/E ratio of 32 is moderately lower than its 10-year median of 35.9.
