Over the last four quarters, LOW’s earnings payout ratio is just 32%, which provides plenty of safety and room for dividend growth. Longer-term, LOW’s EPS payout ratio has increased from less than 10% in 2007 to around 30% last year (see below). This means that LOW’s dividend growth over that time period outpaced its earnings growth.
Eventually dividend growth will moderate to match earnings growth, but a payout ratio of 30% still leaves plenty of room for outsized dividend growth over the near-term.
Source: Simply Safe Dividends
Source: Simply Safe Dividends
LOW’s business held up surprisingly well during the housing crisis. The company’s sales were down only slightly in fiscal year 2009 and fiscal year 2010, although diluted earnings per share dropped by about 20%. While we believe the company is sensitive to the economy, perhaps its repair business helps buffer its results a bit during rockier times.
Source: Simply Safe Dividends
We can see that LOW’s return on invested capital declined from fiscal year 2007 through fiscal year 2010 as the housing market softened but has started climbing up since then. The company’s returns have been pretty consistent, which indicates that LOW’s might have a moat.
Source: Simply Safe Dividends
Importantly, LOW’s has been an excellent free cash flow generator. As seen below, free cash flow per share has grown nicely over the last decade, and we would expect additional growth as LOW improves the efficiency of its stores and eventually slows growth capex.
Free cash flow generation is very important because it allows a company to comfortably reinvest and return capital to shareholders without the assistance of capital markets.
Source: Simply Safe Dividends
Turning to the balance sheet, LOW’s most recent debt to equity ratio was 1.5. This is a bit higher than we like to see, but the consistency of LOW’s cash generation and the slow pace of change in the home improvement retail industry alleviate most of our concerns.
