The Dividend Aristocrats are a select group of 66 stocks in the S&P 500 Index that have each raised their dividends for at least 25 consecutive years. In this five-part series, Ben Reynolds — editor of Sure Dividend — highlights his five favorites.

The Dividend Aristocrats share a number of qualities in common, such as long-term growth, durable competitive advantages, and shareholder-friendly management teams. The top 5 Dividend Aristocrats series will begin with one of the largest retailers in the U.S., Lowe’s Companies (LOW).

Operating In A Near-Duopoly

Lowe’s has increased its dividend for over 50 consecutive years. One of the biggest reasons for this is because the company operates in a near-duopoly, dominating the home improvement retail industry alongside Home Depot (HD). Lowe’s operates or services about 2,200 home improvement and hardware stores in North America.

Over the past decade, Lowe’s has benefited from steady economic growth in the U.S., and the robust housing market. These factors have compelled many homeowners to make renovations and improvements to their homes, and Lowe’s is a major beneficiary of these trends.

2021 was another strong year for Lowe’s. In the fourth quarter, Lowe’s total sales for the fourth quarter came in at $21.3 billion compared to $20.3 billion in the same quarter a year ago. Comparable sales increased 5%, while U.S. home improvement comparable sales increased 5.1%. Diluted earnings per share of $1.78 was a 35% increase from $1.32 a year earlier. For the full fiscal year, Lowe’s generated diluted EPS of $12.04.

Lowe’s has generated strong earnings growth over the past 10 years. A big component of its sustained earnings-per-share growth is share buybacks, which reduce the number of shares outstanding. In turn, this boosts earnings-per-share.

The company repurchased 16.3 million shares in 2021 for $13.1 billion. Additionally, they paid out $2 billion in dividends, all without compromising its balance sheet. The company remains in a strong liquidity position with $1.1 billion of cash and cash equivalents.

Going forward, Lowe’s expects diluted EPS in the range of $13.10 to $13.60 for fiscal 2022. At the midpoint, this would represent approximately 11% earnings-per-share growth for the current year. This should be more than enough EPS growth to continue raising the dividend at a healthy pace.

Valuation & Expected Returns

Lowe’s stock is expected to generate total annual returns of 12.7% over the next five years. This calculation is based on a combination of the company’s future earnings growth, dividends, as well as changes in the P/E multiple.

We expect Lowe’s to grow its EPS by 6% per year over the next five years. In addition, the stock has a current dividend yield of 1.5%. Lastly, shares of Lowe’s trade for a 2022 P/E ratio of 16. We believe this valuation multiple is too low for an industry-leading company.

Our fair value estimate for Lowe’s is a P/E of 20.5. If the P/E expands from 16 to 20.5 over the next five years, it would boost shareholder returns by approximately 5.2% per year. Overall, this leads to total expected returns of 12.7% per year.

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