Home Depot Inc. and Lowe’s Cos. Inc. have increased sales dramatically and watched their shares soar during the coronavirus pandemic.
Shoppers have their preferences, but what about investors? What follows is a comparison of the home-improvement rivals’ recent performance and some long-term food for thought.
Size and comparable sales
is the larger of the two companies, with a market capitalization of $357 billion and net sales of $132.1 billion during fiscal 2020. The company had 2,296 stores at the end of its fiscal 2020 on Jan. 31, in the U.S., Canada and Mexico.
has a market cap of $143 billion. Its net sales for fiscal 2020 were $89.6 billion. It had 1,974 stores in the U.S. and Canada at the end of its fiscal 2020 on Jan. 29.
Comparable-store sales have soared as people have focused on maintaining the homes they have been forced to spend more time in, but also because of the heavy demand for housing. Both companies derive a good portion of sales from home improvement and construction contractors.
Lowe’s had the better comparable store sales growth during the fiscal fourth quarter and for fiscal 2020.
Total sales and profitability
Here’s a look at both companies’ overall sales growth, along with gross margins and operating margins.
First, for the fiscal fourth quarter:
And now for fiscal 2020:
Home Depot has had better gross margins and operating margins than Lowe’s.
A company’s gross margin is its net sales, less the cost of goods sold, divided by sales. Net sales exclude returns and discounts, such as coupons. The cost of goods or services sold includes the actual costs for making or purchasing the items sold or providing the services sold. It doesn’t reflect other overhead expenses. It is a useful measurement of pricing power, and a combination of high sales growth and improved gross margin is a good sign.
Both Home Depot and Lowe’s improved their gross margins during 2020, with Lowe’s showing the greater improvment.
A company’s operating margin is its earnings before interest, taxes and depreciation divided by net sales. It can be considered “return on sales.”
During fiscal 2020, Home Depot’s operating margin narrowed, while Lowe’s operating margin widened considerably.
Free cash flow
A company’s free cash flow is its remaining cash flow after planned capital expenditures. A company’s free cash flow yield can be calculated by dividing the past 12 months’ free cash flow per share by the current share price. Both Home Depot and Lowe’s had free cash flow yields well above their dividend yields, showing “headroom” to raise dividends, buy back shares, invest in expansion, etc.
Shares of Home Depot have a dividend yield of 1.99%, while Lowe’s stock has a dividend yield of 1.20%. Those aren’t very high. But if you had bought shares of either company five years ago, your yields on those shares would be much higher now, because both companies have increased their payouts:
The above table illustrates how long-term shareholders can build income. If you had bought shares of Home Depot five years ago, the dividend yield was 2.05% — only slightly above where it was at the close on May 5, 2021. But if you had held those shares for five years, their dividend yield would be 4.90%.
Home Depot has been more generous with dividend increases over the past five years, although you can see below that for investors who have reinvested their dividends during that period, Lowe’s has been the better performer.
More about growing income: Have you held any of these 20 stocks long term? Your current dividend yield might surprise y-8ou
Stock valuation and performance
Here are forward price-to-earnings ratios based on consensus earnings estimates for the next 12 months among analysts polled by FactSet, along with total return figures:
In comparison, the forward price-to-earnings ratio for the S&P 500 Index is 21.7. Home Depot has the higher P/E and its stock performance has trailed that of Lowe’s over the past five years. But Home Depot has been the winner for 10 years and 15 years.
Wall Street’s opinion
Lowe’s is the current favorite among Wall Street analysts, while the consensus price targets don’t show much upside expected over the next 12 months:
Then again, one year is a short period for these companies, which have shown over long periods that they could weather severe recessions while continuing to dominate their niche.
Both seem best for patient investors who can commit for years. Lowe’s has been the up-and-comer, with faster sales growth and better stock-market performance in recent years. Home Depot has been the faster dividend grower, remains the market leader and has been the better performer for the longer periods.
- May 19 — Lowe’s reports results for its fiscal first quarter.
- May 21 — Home Depot reports results for its fiscal first quarter.