Yet, Lowe's stock has performed well despite the macro environment challenges, producing a total return of nearly 35% over the past year. Anytime a company's share price increases against declining sales (we'll get to that in a moment), it's worth examining why and whether investors should buy, sell, or hold.
A look at Lowe's financials
Lowe's experienced a decrease in net sales for its fiscal 2023 over the prior year. But given the challenges posed by high interest rates affecting the robust housing market -- a significant revenue source for the company -- it's understandable that sales were down. Specifically, Lowe's posted $86.3 billion in sales for fiscal 2023, marking a notable 12.4% decrease from the $97.1 billion achieved in fiscal 2022.
Lowe's management expects low housing turnover and consumer spending to continue shifting away from goods in the company's fiscal 2024. It's guiding for a slight decrease between 2% to 3% in sales, to a range of $84 billion to $85 billion.
Despite slowing sales, Lowe's generated $7.7 billion in net income for its fiscal 2023, representing a 20% increase year over year. The home improvement company grew its bottom line despite falling revenue partly due to a nearly $5 billion improvement in its selling, general, and administrative expenses from $20.3 billion in fiscal 2022 to $15.6 billion in fiscal 2023.
Notably, the company benefited from a cycle of one-time legal settlements during its fiscal 2023. That helped its operating margin -- the percentage of revenue a company keeps as operating profit -- jump from 10.5% in fiscal 2022 to 13.4% in fiscal 2023. For fiscal 2024, management expects the company's operating margin to be between 12.6% and 12.7%.
What could go right for Lowe's
Housing is currently in a down cycle as short-term interest rates of 5.25% to 5.5% persist at a 23-year high. The good news is that the Federal Reserve recently maintained its projection to lower rates to a range of 4.5% to 4.75% by the end of 2024. Combine this with a recent report from Realtor.com estimating that America is underbuilt by 6.5 million single-family homes since 2012, and it appears that the housing market rebound will be inevitable.
In the meantime, shareholders can count on Lowe's as one of the most shareholder-friendly stocks on the public markets. The company is known for returning capital to shareholders through share repurchases and a consistently growing dividend.
First, a company can utilize stock repurchases to lower its outstanding share count, making existing shares more valuable. In its fiscal 2023, Lowe's spent $6.3 billion on share repurchases, lowering its outstanding shares from 603 million to 574 million. Notably, Lowe's has reduced its outstanding shares by 28% in the last five years, a figure that escalates to 44% if you zoom out to 10 years.
Second, Lowe's has a long history of paying and raising its dividend. The company, which distributed $2.5 billion to shareholders in its fiscal 2023, has paid a dividend every quarter since going public in 1961 and currently pays a quarterly dividend of $1.10 per share, which equates to an annual yield of 1.7%.
But arguably more important to dividend-seeking investors is that Lowe's is in the illustrious Dividend Kings club, having paid and raised its dividend for 51 consecutive years.
Image source: Getty Images.
What could go wrong for Lowe's
If you missed that math, Lowe's spent $8.9 billion on dividends and share repurchases during its fiscal 2023 but only generated $7.7 billion in net income. That means the company borrowed money to help pay for a portion of that return of capital to shareholders.
In fact, Lowe's net debt (total debt minus cash and cash equivalents) has roughly doubled over the past three years from $17.5 billion to $34.7 billion.
LOW Net Financial Debt (Quarterly) data by YCharts
Interest rates are at 23-year highs, so this debt is considerably more expensive to service than a couple of years ago when interest rates were considerably lower. To illustrate, Lowe's paid $1.4 billion in interest expense during its fiscal 2023 compared to $885 million in its fiscal 2021. Management anticipates incurring another $1.4 billion in interest expenses in the current fiscal year.
Should management remain aggressive with its share repurchases and annual dividend hikes, it will likely require further debt. So, 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.
LOW PE Ratio (Forward) data by YCharts
Is Lowe's stock worth buying?
Today, Lowe's stock trades at forward price-to-earnings ratio of 21.4, a recent high. Existing Lowe's investors can confidently maintain their positions in a stock that has consistently outperformed the market over the long term. However, potential investors might consider awaiting a more favorable valuation or a decrease in interest rates before buying the home improvement stock.
