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Analyzing Lowe’s and Home Depot’s Returns and Cash Deployment Plans

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Nov. 20 2020, Updated 10:54 a.m. ET

Market reaction to Home Depot’s and Lowe’s results

Markets reacted favorably to Lowe’s and Home Depot’s earnings releases and company guidance. Home Depot’s (HD) price climbed 4.4% to $126.18 on November 17, the day of the earnings release. Lowe’s (LOW), which announced results a day later, saw its stock price rise 1.7% to $72.85 on November 18.

HD and LOW are up 20.5% and 6.8%, respectively, year-to-date as of November 18. In contrast, the S&P 500 Index (SPY) (IVV) (VOO) is up by 1.1% while the SPDR S&P Homebuilders ETF (XHB) is up by 5.4%.

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Share buybacks

Share buybacks are a key earnings and stock price driver for both companies. Home Depot and Lowe’s have spent $5 billion and $3.3 billion, respectively, on share buybacks in the first three quarters of the current fiscal year. This includes $750 million in share repurchases spent by Lowe’s and $2 billion spent by Home Depot in the third quarter.

Home Depot plans on repurchasing shares worth ~$2 billion in the fourth quarter, which takes the total amount spent on buybacks to $7 billion in fiscal 2016. Lowe’s plans to spend $3.8 billion on share buybacks this fiscal year.

Dividends

Both HD and LOW are strong cash generators. Home Depot and Lowe’s generated free cash flow of $6.3 billion and $3.7 billion, respectively, in the first three quarters of fiscal 2016.

According to Carol Tomé, CFO of HD, HD is aiming to pay out 50% of its earnings by way of dividends this year. It’s also looking at deploying excess cash in funding share buybacks. At the same time, it’s also committed to maintaining an adjusted debt-to-EBITDA ratio of 2x.

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HD and LOW have paid out $2.3 billion and $0.7 billion, respectively, by way of dividends this year. HD and LOW were trading at dividend yields of 1.8% and 1.4%, respectively, on November 18. Lowe’s is a dividend aristocrat, making up 0.65% of the holdings in the SPDR S&P Dividend ETF (SDY). Other home goods retailers like Bed, Bath and Beyond (BBBY) and Restoration Hardware (RH) don’t pay a dividend yet.

Expanding returns

Home Depot’s returns have risen. According to HD’s CFO, Carol Tomé, HD expanded its return on invested capital (or ROIC) by 400 basis points to 26.2% in the trailing-12-month period through fiscal 3Q16. Lowe’s disclosed an expansion of 276 basis points in ROIC to 15.8% in 3Q16.

For more sector updates and analysis, please visit our Consumer Discretionary and Retail page.

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