Broadly speaking, the retail industry is in trouble in the United States. Brick-and-mortar retail has been under pressure for several years, due to the e-commerce boom.

Put simply, consumers love the convenience of shopping at home, which has caused physical retailers a great deal of distress. And, that was before the coronavirus crisis hit, which has only exacerbated the trend.

But not all retailers are struggling. Those with an established presence in e-commerce have figured out a way to differentiate themselves from Internet retail competition from the likes of Amazon.com (AMZN) and others. Investors need to be careful when it comes to buying retail stocks, but we believe home improvement giant Lowe’s Companies (LOW) is a retailer built to last.

Lowe’s is a Dividend King, having increased its dividend for over 50 consecutive years. Its long history of growth and dividends makes it a favorite stock among income investors, and even institutional investors such as legendary hedge fund Pershing Square Capital.

Lowe’s stock appears to be slightly overvalued right now, but Lowe’s is a solid long-term holding for dividend growth investors.

Business Overview

Lowe’s Companies is the second-largest home improvement retailer in the United States after Home Depot (HD). Lowe’s has a market capitalization of approximately $126 billion. It operates nearly 2,000 home improvement and hardware stores in the U.S. and Canada.

Despite the extremely weak overall economic conditions to begin 2020, Lowe’s continues to register impressive growth. In the 2020 fiscal first quarter, Lowe’s reported net earnings of $1.3 billion, compared to net earnings of $1.0 billion in the prior year period for a 30% increase. Diluted earnings per share increased 35% to $1.76, while adjusted earnings per share rose 45% to $1.71.

Comparable sales, which measures sales at stores open at least one year, increased 11.2% including 12.3% growth in the United States. It appears Lowe’s hasn’t skipped a beat during the pandemic. If anything, it could be argued that the national lockdowns have motivated consumers to make complete more home renovation projects. This would make a great deal of sense, as many more people are working and learning from home.

The key to Lowe’s success over the course of 2020 has been its booming e-commerce platform. Of note for the first quarter, Lowes.com sales increased 80% year-over-year. This is a key differentiator between successful retailers like Lowe’s and the many retailers that are reporting losses or going out of business. Lowe’s is benefiting right alongside the e-commerce boom.

Investors have benefited in turn, as Lowe’s is a shareholder-friendly company that returns lots of cash each year through dividends and share repurchases. These qualities make the stock attractive for long-term dividend growth investors.

Compelling Cash Returns

Lowe’s generates steady profitability and cash flow even during recessions, which allows the company to buy back its own stock and raise its dividends to shareholders. For example, in the most recent fiscal quarter the company repurchased 9.6 million shares for $947 million and paid $420 million in dividends. Lowe’s has suspended its share repurchases due to the coronavirus pandemic, preferring to retain as much cash as possible in preparation of a prolonged economic downturn. But we expect this decision to be temporary. If the economy recovers in 2021 and beyond, investors can expect share repurchases to continue. Buybacks have the impact of growing earnings-per-share, as they reduce the number of shares outstanding.

Shareholders are also rewarded through rapid dividend growth. Lowe’s has increased its dividend for over 50 consecutive years. It has declared a cash dividend every quarter since going public in 1961. The most recent increase was a 9.1% hike in August 2020, which is impressive given the weak economic environment.

Final Thoughts

Lowe’s has a 1.5% dividend yield, which is below the average yield of the S&P 500 Index. But it makes up for this with a high dividend growth rate, and regular dividend increases each year.

Lowe’s has an excellent business model and the company continues to rack up impressive growth each year, even in a difficult economy. While the stock appears to be slightly overvalued right now, Lowe’s is a solid holding for dividend growth investors.

Bob Ciura has worked at Sure Dividend since October 2016. He oversees all content for Sure Dividend and its partner sites. Bob received a Bachelor’s degree in Finance from DePaul University, and an MBA with a concentration in Investments from the University of Notre Dame.