Saturday, October 1, 2011

Lowe's Losing Market Share to Home Depot. Intituting New Everyday Low Prices. Lowe's Dividends and Profits Should Increase.

Home renovation superstore Lowe's is hoping to revive its fledgling operations with a new everyday low price strategy. Second to Home-Depot, North Carolina based Lowe's has been struggling to compete with Home Depot in recent years as declining same store sales and promotions have trimmed profits. The stock is down 40% from its 2007 high, and is trading for the same prices you could buy it for 10 years ago.

Lowe's has 1,753 stores throughout North America, and hopes to keep adding more as it spreads in Canada and elsewhere.

According to Barron's:

Lowe's "bought back $2.4 billion of stock in the first six months of the fiscal year that ends in January 2012, an amount equal to about 8% of shares outstanding. Last year management set ambitious multi year financial targets, including $3.40 a share in earnings by 2015, sharply higher dividends and $3.6 billion of average annual share buybacks. The company could repurchase half its shares outstanding if buybacks run at the current annual rate, let alone the higher target."

By returning cash to shareholders in the form of dividends and share buybacks, Lowe's management is showing that it has its owners interests in mind. Far too often companies utilize precious shareholder cash to embark on costly acquisition sprees that yield little to no value for owners. When a company returns free cash flow to investors instead of squandering it, the Intelligent Investor should be pleased. To be sure, Lowe's could increase its dividend to 4% and still retain 50% of earnings in the company.

Lowe's is also closing under-performing stores and reducing the ranks of costly middle managers. Currently, Lowe's and Home Depot have a very nice duopoly in the United States, with Rona in Canada providing additional competition north of the border. As the housing market improves in the United States, margins and profits at Lowe's should improve and investors will be rewarded. As a relatively conservative and healthy investment in the American retail and home improvement sector, Lowe's is a solid fundamental choice for the Intelligent Investor.

Cheers and Happy Investing : )

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