Should I Buy Lowe's Stock?

To some investors, Lowe's Companies (NYSE: LOW) stock can look like a desirable holding. Despite its challenges, it is the second-largest home improvement retailer, behind rival Home Depot, and many perceive it as one of the safer stock holdings.

Since the demand for construction, repairs, and remodeling supplies never goes away, it has a likely path for permanent growth as long as it continues meeting customer needs. But will that produce enough growth to keep an investor in that stock? Let's take a closer look.

The state of Lowe's

Investors should first understand that Lowe's is a value stock. Its 1,747 stores across all 50 U.S. states come close to saturating the market. Since it has closed or sold all its locations outside of the U.S., store expansion will likely proceed at a slow pace.

Still, one benefit of its place in the investing world is that long-term shareholders have a tremendous incentive to stay with Lowe's stock because of the dividend. At $4.60 per share annually, its dividend yield of 1.7% exceeds the S&P 500's yield of 1.2%.

It's also a Dividend King, meaning it has a track record of annual payout hikes going back more than half a century. Thus, long-term shareholders are earning considerable returns without selling any shares.

However, its situation may leave investors wondering how its long-term growth could exceed inflation and population growth. CEO Marvin Ellison believes Lowe's can accomplish that goal through what it calls a "Total Home Strategy." This approach hinges on five aims:

• Increased business ties to professional contractors
• Higher online sales
• Adding more installation services
• An emphasis on localization
• Elevation of production assortment

Inflation had slowed demand for discretionary do-it-yourself projects. Still, in the near term, falling interest rates could help Ellison's strategy succeed.

The state of Lowe's financials

For now, Lowe's continues to suffer the effects of a sluggish economy. As a result, revenue in the first nine months of its fiscal 2024 (ended Nov. 1) was $65 billion, a 4% decline from the same period in fiscal 2023. Operating expenses rose slightly during that time. That led to a net income of $5.8 billion, 13% less than it earned in the first three quarters of fiscal 2023.

Even though its outlook has improved, the $83 billion in projected revenue translates into a decline of just under 4% for fiscal 2024. Although analysts predict an increase of less than 2% in fiscal 2025, growth levels still appear tepid.

Admittedly, Lowe's stock slightly outperformed the S&P 500 over the last year, so investors seem optimistic.

Nonetheless, its price-to-earnings (P/E) ratio of 23 is slightly above the stock's five-year average earnings multiple of 20. That could mean the stock has already priced in much of an anticipated recovery, leaving investors little incentive to add shares.

Should I buy Lowe's stock?

Under current conditions, investors should probably treat Lowe's stock as a hold. As previously mentioned, the constant need for new construction, repairs, and remodeling should keep the home improvement giant profitable and will likely continue to fund annual payout hikes.

Unfortunately, demand for home improvement supplies has its limits. Since it pulled out of Canada and Mexico, Lowe's will have to figure out how to derive more revenue without significant store additions. Although Ellison's Total Home Strategy could spark additional growth, it is unlikely to change Lowe's profile as a slow-growth business, and the stock will probably struggle to outperform the S&P 500.

Indeed, long-term shareholders should stay in the stock and collect a dividend that will probably continue to increase annually. However, most investors are likely to earn higher returns at a lower risk by simply staying with the indexes.

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Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot. The Motley Fool recommends Lowe's Companies. The Motley Fool has a disclosure policy.