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This has not been a great year for the home improvement retailer Lowe's (NYSE: LOW).
Lowe's stock is down about 23% year-to-date, and it is currently trading near a 52-week low of $186 per share. It has been on a sustained decline since it released second-quarter earnings on Aug. 19, falling about 15%.
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But this looks like a great buying opportunity for Lowe's stock, as its price/earnings ratio has dropped to 16, its lowest level in three years. And as a Dividend King, it's got a long and reliable history of dividend increases (55 consecutive years). Here's why this retail stock is a solid buy on the dip.
Housing is a cyclical business, and Lowe's very much tends to move with trends in the housing industry. Right now, mortgage rates and inflation are high, and consumers are pulling back on buying new houses and on non-essential expenses, like doing home improvement jobs.
This hurts retailers like Lowe's, as home improvement work, whether to existing homes or new ones, drives its sales.
That was apparent in its second-quarter earnings report. While revenue rose 8% year over year to $26 billion, same-store sales were essentially flat. The growth came from new store openings and recent acquisitions designed to bolster the commercial side of the business serving contractors.
Yet, earnings were flat, due mainly to costs associated with those acquisitions.
But what sparked the sell-off was its outlook. Lowe's reduced its guidance to the lower end of its previous ranges for sales, same-store sales, operating income, and earnings. The lowered guidance reflects slower growth in the first half of the year, along with expected trends in the second half. With mortgage rates and inflation rising, conditions aren't going to improve much, if at all.
There are a few reasons why this is a buying opportunity for Lowe's. One, the stock is as cheap as it has been in three years. Secondly, as noted, housing is cyclical, so when rates stabilize and begin to decline (perhaps next year), people will start buying and selling houses and taking on home improvement projects.
Given the challenging conditions that have persisted for most of this year, there will be pent-up demand when things do improve -- and Lowe's, along with its rival Home Depot (NYSE: HD), will be well-positioned to capitalize.
Also, Lowe's has increased its dividend for 55 consecutive years. It has a robust $7.1 billion in cash flow from operations through the second quarter, with about $1.1 billion in capital expenditures. That still leaves some $6 billion in free cash flow to easily maintain its dividend. It has a payout ratio of 38%, which is pretty much right in the sweet spot, as it has plenty of cash to maintain or increase its dividend without sacrificing growth investments.
Wall Street analysts are bullish on Lowe's stock at this valuation, with 72% rating it a buy. Lowe's stock has a median price target of $254 per share, which suggests 36% upside.
Lowe's stock might remain sluggish for the rest of the year, but this is a good, cheap valuation to buy it at, and you get the benefit of a great dividend.
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Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot. The Motley Fool recommends Lowe's Companies. The Motley Fool has a disclosure policy.
This Dividend King Stock Just Offered a Superb Buy-the-Dip Opportunity was originally published by The Motley Fool
