Investment Jungle

Having run my first dividend stock screener, I will now be analyzing those companies to determine whether or not they are indeed high quality dividend paying companies and validate the effectiveness of my screen.

The company that I will be analyzing is Lowe’s Companies Inc (LOW).

Company Profile

From their 10K Annual Filing:

Lowe’s Companies, Inc. and subsidiaries (the Company) is a Fortune 50 company and the world’s second largest home improvement retailer, with specific emphasis on retail do-it-yourself (DIY) customers, do-it-for-me (DIFM) customers who utilize our installation services, and Commercial Business Customers. We offer a complete line of products and services for home decorating, maintenance, repair, remodeling, and property maintenance. As of February 2, 2007, we operated 1,385 stores in 49 states, with 157 million square feet of retail selling space.

Current Dividend Analysis:

LOW current has a dividend yield of 0.65%. This is low compared to the current divided yield of such indexes as the S & P 500 (1.89%) and the Dow Jones 30 Index (2.26).

Financial Analysis:

LOW has in fact been paying out a regular dividend since at least 1997 (the beginning of my stock data). The dividend growth rate has exploded in the last 4 years with dividend growth rates of 30.95%, 36.36%, 46.67%, and 63.64%. Overall, this gives LOW’s a 10 year dividend growth rate of 21.35% (just over the minimum 20% set in the screen).

Of course, most of this dividend growth has occurred in the last 4 years and the US real estate market has been red hot over all those years.

LOW’s has shown strong cash flow growth for the entire 10 year period with growth rates above 15% for every single year. Over the 10 years of data, the cash flow growth rate has been 23.96% (just over the minimum 20% set in the screen).

The dividend payout ratio is extremely low. It is currently sitting at 9.05%. Looking at Lowe’s dividend history, the payout ratio has remained below 10% at all times.

Historical Dividend Yields:

Looking at the high and low average dividend yields over the 10 year period, Lowe’s has average a high dividend yield of 0.42% and a low dividend yield of 0.26%. However, last year’s high dividend yield reached 0.69%.

Intrinsic Value Based on Dividend:

Based on an average high dividend yield of 0.42%, the intrinsic value for Lowe’s stock would be $47.32. Today’s price of $30.87 would represent a discount of 34.76%. If last year is any indication, with its high dividend yield of 0.69%, then Lowe’s could be sitting at its intrinsic value right now.

Here is a summary of my dividend calculations.

Rule #1 Analysis:

Let’s look at how Lowe’s rates using the Rule #1 methodology.

Rule #1 Big Five:

The Big Five have all been solid performers. However, last year’s sales growth rate dropped below 10%. Definitely something to dig into deeper if this company becomes a Rule #1 candidate.

Sticker Price:

Using the Rule #1 methodology, I calculated the sticker price to be $30.87. Are you kidding me? That is today’s price! And in my dividend analysis, adjusting for last year’s higher dividend yield, I also determined that the current price was hovering right around the intrinsic value of the stock!

Here is the summary of my Rule #1 calculations.

Conclusion:

Well, the first stock out of my dividend screening results seems to be sitting at its sticker price. It has shown solid dividend growth over the last 10 years. Of course, that has been fueled by the huge housing boom in the US over the last few years. With the US housing boom now over, will Lowe’s continue to perform at this exceptional rate?

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