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

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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.

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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%.

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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.

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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:

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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.
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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! 🙏
SLT Research's avatar
Nice writ-up Josh! Really like the focus on ROIC and capital allocation.
Josh Kohn-Lindquist's avatar
@slt_research much appreciated SLT 🙏

I was surprised at how well their figures have held up post pandemic.

It seemed natural for a decline to be incoming as remodeling spiked during the pandemic.

Love the floor its dividend and share repurchases provide for investors over the long haul. It can outperform even with minimal sales growth.
SLT Research's avatar
@joryko It is particularly interesting when looking at $LOW EPS vs. revenue growth over the recent years.

Was looking at consensus estimates and sales are expected to plateau around $97-98bn. However, and to your last point, EPS is expected to grow 14% in 2023E.
Josh Kohn-Lindquist's avatar
@slt_research Exactly, makes it a nice buy and forget about holding, which is nice in todays market.

Dont mean to say it’s infallible, look to further than $BBBY despite it’s history of high buyback rates, but Lowe’s is a much safer, and fundamentally more important business, too.
Ben's avatar
Great review. Love the long term tailwinds of the home improvement retail space. Amazon can’t disrupt selling 2x4, appliances and miter saws.

Still prefer $HD when compared to $LOW as my long term holding. Despite what Larry Ellison has been able to achieve making $LOW a competitor


Josh Kohn-Lindquist's avatar
@rpinvestments 🙏 I don’t think investors would be wrong with either at all.

I just really like how Ellison has kept ROIC rising and the fact that Lowe’s is just a tiny bit cheaper and buying shares back faster.

Buying both in equal portions would make a lot of sense, regardless.
Sagar Vensi's avatar
The shares outstanding chart is brilliant.
Josh Kohn-Lindquist's avatar
@stockado It is an absolute masterpiece from them.

Really helps power EPS higher, even during weaker market conditions. Lower the valuation, the better.
Sagar Vensi's avatar
@joryko I missed the bus completely.
Josh Kohn-Lindquist's avatar
@stockado Never too late, especially at the valuation it currently has. Hoping it'll bring stability to my portfolio over the long run.
Sagar Vensi's avatar
@joryko I'm focusing more on healthcare right now for stability but yes, it's a good stock.
Scoreboard Investor's avatar
Like seeing some different analysis on companies I hold. Thanks, @joryko!
Josh Kohn-Lindquist's avatar
@scorebdinvestor absolutely 👍 thank you for reading 🙏