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Thursday, April 18, 2024

Lowe’s piles up debt as sales turn down

Some of us are spending plenty of money at Lowe’s these days for the spring growing season, but there’s a lot more going on at the giant Mooresville-based retailer than peddling grass seed and lawnmowers.

Motley Fool noted in a recent article that Lowe’s spent $8.9 billion on dividends and share repurchases during its 2023 fiscal year. That was more than its $7.7 billion in net profit, which means the company is borrowing “money to help pay for a portion of that return of capital to shareholders,” the financial website reports.

Lowe’s is widely viewed as a shareholder-friendly company because it has raised its annual dividend for 51 consecutive years. Moreover, it has cut its outstanding shares by 28% over the past five years, and 44% over the past decade. That boosts the value of remaining shares.

It’s the second-biggest home-improvement retailer behind Home Depot, operating as an oligopoly in some ways given the two company’s industry dominance.

CEO Marvin Ellison has emphasized his interest in benefiting Lowe’s shareholders since he arrived in mid-2018. He has appeared frequently on CNBC stock enthusiast Jim Cramer’s program, discussing the company’s outlook.

What pays off for investors has also meant a sharp increase in debt at the company: $34.7 billion in net debt, or total debt minus cash. That is two times as much as three years ago. Of course, interest rates are much higher now. The company expects to spend $1.4 billion on interest this year, similar to its expense in 2023 – and more than the $885 million spent in 2021.

As a result, Lowe’s has a debt-to-capital ratio topping 150% which is more than triple the 40% ratio that is preferred by rating agencies, notes blogger Kody Kesler, who recently wrote an analysis of the company on the Seeking Alpha website. Lowe’s 1.7% annual dividend yield and 40% dividend payout ratio is well below the industry average, he says. Home Depot shares yield 2.4%

Lowe’s can take on debt because of its strong cash flow, which exceeded $6 billion last year despite a 12% decrease in total revenue to $86 billion. The company expects another slight decline in revenue this year to about $85 billion.

Lowe’s remains a well-capitalized, widely admired company. But there is a potential downside, Motley Fool notes. “While Lowe’s has a long track record of success, its growing debt could snowball into a problem if the housing cycle takes longer than expected to recover,” it reports.

Lowe’s has had a total return of nearly 150% over the past five years, compared with about 110% at Home Depot and nearly 100% for the S&P 500 Index. But Lowe’s shares have been essentially flat for since late 2021, trading between $175 and $250 during that period. They traded at $245 in midday trading today.

Eighteen of the 23 analysts who track Lowe’s have “buy” ratings on the stock, according to Yahoo Finance.

 

David Mildenberg
David Mildenberg
David Mildenberg is editor of Business North Carolina. Reach him at dmildenberg@businessnc.com.

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