1 Home DIY Stock To Buy Hand over Fist?

As one of the two largest home improvement store chains, Lowe’s has benefited significantly from the robust real estate market and heightened consumer appetite for DIY projects over the last few years. That run, however, may be coming to an end.

Spending on home improvement projects is expected to drop from $481 billion in 2023 to around $450 billion in 2024, creating a difficult environment for companies like Lowe’s. This raises the question of where Lowe’s will be next year and whether the stock is still a good long-term buy.

Slower Spending Has Already Begun to Hit Revenues

Due to its strong ties to DIY home improvement, Lowe’s can be a somewhat cyclical business. With consumers scaling back on home improvement projects, the company has experienced a reduction in overall sales.

In Q4, comparable sales decreased by over 6% on a year-over-year basis. Total revenues for the quarter dropped from $22.4 billion a year ago to $18.6 billion in the most recent period.

Much of this slowdown in consumer spending has its roots in the current macroeconomic environment. Higher interest rates and material costs increased by inflation both make home improvement projects less attractive to homeowners at the moment.

Slowing home sales also appear to be a factor, as homeowners are less likely to improve their properties with the intent to sell at a higher price in the near future.

To some extent, the current slowdown also represents a bit of a return to normalcy from the much higher home improvement spending that accompanied lockdowns a few years ago. Many homeowners completed the projects they had planned, leaving fewer upcoming ones left to finish. The natural result of this is a shift back toward a somewhat more normal level of home maintenance.

Despite Slower Sales, Earnings Are Still Strong

While revenues have dropped, Lowe’s earnings remain quite high. In Q4, the company generated earnings of $1.77 per diluted share, compared to $1.58 in the year-ago period.

For the full year, Lowe’s reported $13.23 in earnings per share, a significant jump from the $10.20 it posted in 2022. Over the trailing 12 months, Lowe’s has maintained a net margin of 8.9%.

It’s worth noting that Lowe’s has gotten what appears to be a permanent boost in earnings since that fated 2020-21 era. Even with the recent slowdown, spending on home improvement projects remains markedly higher than it was prior to that period. As a result of this and the company’s quality execution, earnings have trended steadily upward since 2019.

With that said, it appears that the company’s earnings are likely about to stabilize at their new, higher level. Analysts project earnings growth of under 2% compounded over the next 3-5 years. This plateau in earnings in the near future could prevent share prices from moving appreciably higher over the coming year.

Share Buybacks and Dividends To Improve Returns

One tailwind for Lowe’s is likely to be its ongoing program of share repurchases. In 2023, the company repurchased roughly $6.3 billion worth of stock.

Continued buybacks may give Lowe’s shares some additional price support, though it likely will make only a modest impact on returns over the coming year.

What could provide a larger boost to shareholder returns, however, is Lowe’s 1.8% dividend. The company has a 44-year record of dividend increases, and the current payout ratio is just over 33%.

Given these factors, Lowe’s dividend will likely be both a positive for shareholders this year and a long-term contributor to total returns as the distribution continues to increase in coming years.

Where Will Lowe’s Be in 1 Year?

According to 32 analysts, Lowe’s can rise to as high as $250.21 over the next year, implying 5.4% upside.

Unsurprisingly, analysts see shares of LOW advancing only modestly in the upcoming 12 months. Despite this, nearly half of the analysts covering Lowe’s still rate it as a Buy due to the potential for long-term returns and the overall quality of the business.

It’s also worth considering that Lowe’s appears to be fairly valued. The stock trades at 19.8x forward earnings and 1.6x sales, both of which are quite reasonable for a company that is robustly profitable.

While growth will likely be flat for some time, future increases in consumer spending are likely to elevate Lowe’s prospects once again, particularly if the Federal Reserve begins to reduce interest rates later this year, thereby making project financing more affordable.

On the other end of the spectrum are competitive threats. As the biggest home improvement company in the world, Home Depot is a factor in any consideration of Lowe’s as an investment.

Because the difficulties Lowe’s faces are primarily macroeconomic, though, the same forces are also acting on Home Depot.

While the two giants will certainly continue to compete for market share, it’s unlikely that Home Depot will be able to significantly outpace Lowe’s at a time when the entire home improvement industry is slowing down.

The Bottom Line

With consumers reducing their spending on home improvement projects, this may well be a challenging year for Lowe’s. Although the company’s earnings don’t appear likely to fall this year, they likely won’t advance much. As a result, there may be comparatively little upside in LOW share price this year.

Even though Lowe’s is forecast to appreciate by about 5% this year, the company’s strong dividend could help investors see total returns closer to 7%.

This is still weak compared to the outlook for the broader market, but Lowe’s could be a decent choice for conservative investors looking for a mix of some growth and dividend income.

It’s also worth noting that the lack of near-term returns don’t rule out Lowe’s as a long-term investment. The business is still quite sound, and the stock trades at a more or less fair price. As such, investors with long time horizons are likely to still see many years of slow, steady returns from LOW.

This is especially true for dividend growth investors, as management still appears to have room to continue raising Lowe’s dividend at a steady pace for the foreseeable future.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.