Dividend Stock Analysis – LOW

For the first time in the last decade, Lowe’s turnover decreased year-on-year. The company demonstrated steady revenue growth overall with a Compound Annual Growth Rate (CAGR) of 6.9% but the sales fell to USD 86 billions in 2024.

According to the company, the sales decrease is partially due to the sale of their Canadian retail business back in 2022. However, the sales still decreased by approximately 5% on a like-for-like basis which is concerning but could be explained by the high inflationary environment we experienced in 2023 and early 2024. Lowe’s sales must bounce back next year to still be considered as a high quality stock.

Lowe’s EBITDA has shown significant growth with a CAGR of 9.1% over the past decade. The strong performance highlights Lowe’s focus on improving operational performance and cost management.

While Lowe’s revenue decreased in 2024, its EBITDA strongly rebounded: 2024 EBITDA increased 10.3% from 2023. This suggests an effective cost control from the company in a difficult retail market. Lowe’s reduced its SG&A expenses by almost USD 5 billions compared to the prior year.

Lowe’s Free Cash Flow (FCF) has experienced a moderate growth, reaching a CAGR of 4.8% over the past decade. This growth supports Lowe’s ability to fund dividends, share buybacks, and strategic investments.

The FCF have decreased significantly after the highs of 2021 and 2022 but the company has kept a moderate long-term growth. It is important to note that its 2023 FCF included a USD 2.5bn one-off capital gain on the sale of their Canadian business. Thus, 2024 is showing a significant improvement in cash flows with a better inventory management.

Lowe’s debt to FCF ratio keeps deteriorating and reached its highest point of 5.8 since the Covid-19 crisis. It suggests a significant reliance on debt which might require attention to ensure long-term financial health.

However, Lowe’s debt has increased at a slower pace than 2023 and 2022. The deterioration of its Debt to FCF ratio is mainly due to its difficulties to generate higher FCF.

A payout ratio of 41.0% suggests that Lowe’s allocates a moderate portion of its earnings towards dividend payments. It leaves ample room for reinvestment and potential future dividend increases but has increased significantly compared to Lowe’s historical ratios.

41% is not alarming and ensures that the company can continue to reward shareholders while also investing in growth opportunities.

Lowe’s has engaged in significant share buybacks, reducing its outstanding shares by a CAGR of -5.7% over the past decade. This trend has not declined despite lower sales and FCF recorded in 2024 which reflects the management’s confidence in the company’s intrinsic value.

The reduction in outstanding shares through buybacks increases the value of remaining shares and is a great way to reward shareholders. Lowe’s is buying back outstanding shares at a strong pace.