Last Updated on April 23, 2023 by Prakash Kolli
The home improvement retail industry is not very fragmented. Instead, it is effectively an oligopoly, with Lowe’s (LOW) vs Home Depot (HD) and being the two most prominent players. Both are blue-chip stocks with long histories of paying and raising their dividends.
Being part of an oligopoly can pay off for companies as long as all players are not overbuilding and prioritize margins over market share battles. That holds true for the home improvement retail market and explains why both Home Depot and Lowe’s have been highly successful both in the recent past and in the long run.
Retail is an industry with headwinds, but that does not hold true for all brick-and-mortar retailers to the same degree. Home improvement retailers have easily outperformed most other brick-and-mortar retailers over the last decade. They have benefited from a housing boom that causes growing demand from both professionals and consumers working on projects. However, which stock is better for investors. In this article, we compare and contrast Lowe’s vs Home Depot stock.
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Lowe’s vs. Home Depot Stock
Past Track Record
Home Depot and Lowe’s have been strong investments in the past, as a combination of growing same-store sales, margin improvement, share buybacks, and dividends made for highly attractive total returns over a long period.
Over the last decade, their total returns were pretty similar: Lowe’s generated a 660% total return in that time frame, while Home Depot’s total return in the same period was 620%. Moreover, both companies easily outperformed the broad market, as the S&P 500 Index generated a 260% total return over the last ten years.
Lowe’s track record is particularly noteworthy when it comes to dividend payments. Since the company has raised its dividend every year for 60 years, the company has become not only a Dividend Aristocrat over time but also a Dividend King. Home Depot has a solid dividend growth track record as well, although it is not as extraordinary as that of Lowe’s, having raised the payout for 13 years in a row making it a Dividend Contender.
Both companies are not opening a large number of new stores. That makes sense, as oversaturating the market is in neither’s best interest. Instead, business growth is primarily generated through same-store sales growth. Each location is selling an increasing amount of goods over time, and the prices for these goods have risen over the years.
This combination has allowed both companies to grow their same-store sales at a highly attractive pace in the past, especially when compared to the uninspiring same-store sales performance of many other brick-and-mortar retailers that are not selling home improvement goods.
From now on, we believe that both companies should be able to grow their same-store sales by a 3% to 5% rate on average, although it should be noted that there could be some ups and downs on a year-over-year basis, e.g., due to potential recessions or housing market downturns.
Home Depot has been pretty good at growing its margins over time, and we believe the same will hold true in the future. Lowe’s has increased its margins over time, but not as consistently as Home Depot did. We thus believe that margin improvement could be a more significant factor for Home Depot’s earnings growth in the coming years.
Last but not least, buybacks play an essential role in the earnings per share growth that these two companies have generated in the past. Both companies financed buybacks with debt to some degree in the past. This point will likely not be the case forever due to rising interest rates since balance sheet leverage can’t increase endlessly. Nevertheless, both companies generate cash flows that are high enough to allow them to buy back shares regularly.
Overall, we believe that Home Depot should be able to grow its earnings per share by at least 7% per year in the long run, while Lowe’s is forecasted to grow its earnings per share by at least 6% per year going forward.
As shown above, Lowe’s is one of just a few Dividend Kings investors can buy. However, its dividend yield is not overly high, and Home Depot offers a higher current income stream today. According to Portfolio Insight*, Lowe’s dividend yield is approximately 1.7% today, nearly in line with the broader market’s average dividend yield. On the other hand, Home Depot offers a dividend yield of about 2.6% at current prices, which is considerably higher.
Regarding the companies’ dividend growth rate, we can say that both companies have delivered solid increases in recent years. For example, according to Portfolio Insight* Lowe’s dividend growth rate over the last five years is around 17.3%, while Home Depot’s 5-year dividend growth rate is marginally higher, at roughly 19%.
Overall, we can say that Home Depot’s substantially higher yield and marginally higher dividend growth make it look more favorable from a dividend growth perspective. But on the other hand, Lowe’s ultra-long dividend growth track record that remained intact throughout many crises could make Lowe’s the better choice from a risk perspective.
Valuation And Expected Returns
In recent years, the robust housing market was a significant tailwind for both companies, and their profits improved consistently. However, with interest rates rising, the macro environment will likely be less helpful going forward, although high housing demand will likely not wane immediately.
Both companies have seen their shares pullback over the last couple of months, which has made their valuations decline to very undemanding levels. Home Depot is trading at ~18X this year’s expected net profits, while its peer Lowe’s is valued at just ~14x net profits today. Home Depot’s valuation has been higher than Lowe’s in the past, although the discount has not always been this high. Both companies used to trade at higher valuations in the past, so we believe that both companies could see their multiples expand going forward.
Based on solid earnings per share growth, dividends that will be growing over time, and expected multiple expansion tailwinds, 10%+ returns seem likely for both companies. Lowe’s is forecasted to generate total returns of 12%+, while Home Depot is predicted to generate total returns of 11%+ in the future. Lowe’s higher estimated total returns, despite a lower dividend yield, can be explained by the fact that multiple expansion tailwinds should be more meaningful for Lowe’s than what we expect for Home Depot today.
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Final Thoughts on Home Improvement Retailers: Lowe’s (LOW) vs. Home Depot (HD)
All in all, both companies are high-quality picks that promise compelling total returns in the long run. Some may favor Lowe’s for its Dividend King status and lower valuations. In contrast, others may prefer Home Depot due to its higher dividend yield — likely, going with any of the two companies or both will be a solid choice.
You can also read the 3 Highest Yield Dividend Champions in 2022 by the same author.
Disclosure: Members of the Sure Dividend team are long LOW and HD.
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Ben Reynolds founded Sure Dividend in 2014. Reynolds has long held a passion for business in general and investing in particular. He graduated Summa Cum Laude with a bachelor’s degree in Finance and a minor in Chinese studies from The University of Houston. In his spare time, Reynolds enjoys watching movies, reading, exercising, and relaxing with his wife, author Shina Reynolds.