Paul Cerro's avatar
$36.7m follower assets
Consumer & Retail Weekly Recap #12: 9/25 out now!
Company Announcements $WMT $AAPL $PTON $SPOT $GM $HMC $HD

Corporate Shakeups $JWN $SKT $KSS $FRPT $PTON


Financing News $FXLV $RCL $TM

Regulatory Updates $IRBT $MCD $AMZN

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Josh Kohn-Lindquist's avatar
$24.5m follower assets
September Idea Competition: Fishing in a Stocked Pond With Lowe's
With the macroeconomic and geopolitical landscapes battling to see which can get weirder, I have found myself browsing through some of the most mind-numbingly tranquil stocks on the public markets.

As this uncertainty continues to hang around, turning to some of my favorite stocked ponds (filters and screeners) is a simple way to drown out the short-term noise.

Today we will look at one of these stock ponds and see why $LOW currently stands out as a high conviction, long-term buy for me.

The Stocked Pond
  • Annual dividend increases and a payout ratio below 50%
  • Consistently declining share count
  • High and rising Return on Invested Capital (ROIC)

Why These Metrics Matter

Dividend Growers Outperform

I particularly like dividend growers with a payout ratio below 50% as it demonstrates a balance between funding company growth and dividend increases -- helping to avoid becoming an underperforming dividend cutter, as shown above.

Sporting 60 consecutive years of dividend increases, Lowe's not only has an incredible track record but has a consistently low payout ratio.

Except for 2019, when current CEO Marvin Ellison replaced his entire merchandising team in his first full year at the company, the Dividend King has had an incredibly stable -- and more importantly -- low payout ratio.

Share Cannibals Outperform

Per Globe and Mail, from 1988 to 2007, the top quintile of share-reducing stocks outperformed the broader market by 3.1 percentage points, while the bottom quintile of share-adding companies underperformed by 5.2 percentage points.

Lowe's share repurchases since 2010 have been nothing short of remarkable-- down over 57%.

The beauty of this consistently declining share count is that it builds a solid foundation for earnings per share (EPS) growth -- even if the top line doesn't deliver rapid expansion.

High and Rising Return on Invested Capital Outperform

Investopedia defines ROIC as "a calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments." Simply put, if a company's ROIC is higher than its Weighted Average Cost of Capital (WACC), it creates value.

Lowe's current ROIC of 38% far exceeds its WACC of 9% (according to gurufocus), demonstrating that the company is generating incredible profits from its capital.

Best yet, this high ROIC is still rising:

This high and rising ROIC is important as Motley Fool contributor John Rotonti highlighted that stocks in the top two ROIC quintiles nearly doubled the returns of The Motley Fool Investable Universe from 2004 to 2019.

Similarly, the top quintiles of stocks with a rising ROIC nearly tripled the returns of this peer group over the same time horizon.

Lowe's: The Business

While home improvement retailer Lowe's itself most likely needs no introduction, it operates nearly 2,000 stores in the United States and Canada. Combined with its main competitor, $HD, the two stocks account for almost one-third of the US's $900 billion home improvement market.

Recording 75% of its revenue from do-it-yourself (DIY) sales and 25% from Pro customers -- Lowe's succeeds regardless of the housing market. Lowe's is happy whether new home construction is booming and fueling pro sales or homeowners are happily staying put and remodeling.

Highlighting this fact is that during the Great Recession of 2008, Lowe's only experienced a single-digit sales decline while recording a positive EPS throughout the downturn. Meanwhile, despite adding over $25 billion in annual sales from 2019 to 2021 thanks to lockdown-fueled remodeling, the company has retained all of its revenue increases over the last year while growing EPS an additional 10%.

While this 25% of sales from Pro customers may not sound like much, this figure grew from 19% in 2018 and is set to continue rising as the US faces a construction shortage of 1.5 to 2 million homes.

A Share Cannibal With a Cheap Valuation is a Beautiful Pairing

With an earnings yield of 6.7% at a decades-long high (other than March 2020) and a dividend yield well above its 10-year average, Lowe's valuation looks intriguing.

This cheap valuation is particularly beneficial to Lowe's as it juices the returns it sees from its consistent share repurchase program -- fueling continued growth on the bottom line.

All in all, Lowe's has a:
  • 60-year dividend increase streak
  • 1.8% dividend yield
  • 26% payout ratio
  • tremendous share repurchase history
  • rising ROIC of 38% versus a WACC of only 9%
  • quietly budding Pro business
  • historically cheap valuation

I am looking forward to what you all think of Lowe's at these prices -- thanks for reading! πŸ™
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Dividend Forecast - Week of 9/12
Below are my incoming dividends this week and how they will be utilized:
$FUN - $0.30 per share, $0.90 total, reinvesting
$O - $0.25 per share, $0.52 total, reinvesting
$MCD - $1.38 per share, $2.80 total, reinvesting
Roth IRA
$CSX - $0.10 per share, $0.30 total, cash
$HD - $1.90 per share, $3.80 total, cash
$HSY - $1.04 per share, $2.08 total, reinvesting
Do you have any dividends coming in this week?
August Portfolio Review
Interesting month in August. Some macro events driving markets, rollercoaster in the oil space and the ever evolving inflation landscape.

Here is how my portfolios reacted and performed this month:

Overall Top 12
Not very much change in my Top 12, just some shuffling. $AAPL price increase moved it from #8 to #7. $TGT rose from #12 to #11. Other than that, no changes.

Taxable Portfolio
% Change (vs S&P): -2.64% (+1.33%)
Contributions: $94
Dividends: $16.92 (+29.9% over August '21)
Buys: None
Dividend Reinvestments: 0.0216 shares of $CARR, 0.0055 shares of $AAPL, 0.0301 shares of $ABBV, 0.0070 shares of $O
Sells: None
Cash: 1.75%

Top 5 Positions:
  1. $CMA (13.4%)
  2. $VTI (11.9%)
  3. $VEA (7.0%)
  4. $VWO (4.9%)
  5. $PFE (4.5%)

Historic Trend:

Roth IRA
% Change (vs S&P): -2.79% (+1.18%)
Contributions: $50 (thanks @commonstock)
Dividends: $10.34 (+54.6% over August '21)
Buys: None
Dividend Reinvestments: 0.0056 shares of $LOW, 0.0163 shares of $EMB, 0.0427 shares of $CARR, $0.0511 shares of $SBUX
Sells: None
Cash: 1.83%

Top 5:
  1. $VTI (12.2%)
  2. $VNQ (11.4%)
  3. $SBUX (9.4%)
  4. $VIG (9.1%)
  5. $HD (7.2%)

Historic Trend:

Thanks for following along on my journey. Glad to be able to share here and hold myself accountable with all of you! Would love to hear any thoughts or comments below!
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What was running through your mind when Target had that big drop in May? Did it make you want to sell, add more, or indifferent?

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Paul Cerro's avatar
$36.7m follower assets
It's All About "Perspective"
Just because some retailers have beat sales estimates recently does not mean they're out of the woods yet.

Take a look at 12 companies in this week's "Chart of the Week" that shoes how dire the inventory situation has become.

What is the best?
Random Poll
If you don't like any of these companies comment another one with a real reason why you like it!
What is your favorite of these companies?
7%Home Depot
26 VotesPoll ended on: 08/29/22
Luka πŸ¦‰'s avatar
$103.6m follower assets
The Home Depot πŸ’Έ $1.90/share (in line)
Great news from $HD. The company approved another solid dividend, and the board authorized a $15B buyback program; we are talking about 4.5% of the company value. Such a huge buyback will help keep the stock price high and make the dividend safer due to the lower amount of shares to pay for.
Yield 2.34%
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$HD Pricing Power
$HD proved its pricing power and passed inflation onto the customer during the last quarter. Avg ticket size increased driven primarily by inflation and operating margins expanded to 16.5% from 16.1%.
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