Home Depot and Lowe's: Do-it-Yourself Gains

04/03/2014 8:00 am EST

Focus: STOCKS

John Dessauer

President, John Dessauer Investments, Inc.

In our view, stocks remain the best choice for income and capital gains, says John Dessauer. In his Dessauer’s Investments newsletter, he highlights the two leading home improvement product retailers.

Home Depot (HD) suffered from the record setting bad weather in the northern half of the United States, but delivered fourth quarter results that matched expectations.

Operating income dropped 1%, but, thanks to stock buybacks, earnings per share rose 7.3% to $0.73. For the full 2014 fiscal year, Home Depot earned $3.76 a share, up 25% from last year.

Management said the board has authorized a 21% increase in the dividend to $0.47 per share per quarter, for a 2.3% annual yield. For this year, management expects earnings to rise 16% to $4.38 a share.

Home Depot is a well-managed company with a solid track record, and above average prospects for future growth. My advice is to buy Home Depot on any temporary pullback to less than $80.

Lowe’s (LOW) reported a stronger than expected fourth quarter, and the stock moved up about 5%. For the final quarter, adjusted earnings per share were $0.31, which matched analysts’ expectations.

The surprise was that net sales in the fourth quarter were up 5.6%. (Home Depot reported a 3% sales decline in the quarter.) It was a rough quarter because of the winter storms that closed airports and disrupted sales for most retailers.

Lowe’s new distribution centers and product delivery methods paid off. The quarter provides strong evidence that Lowe’s is closing the gap with Home Depot. Management added $5 billion to the stock buyback program. That is almost 10% of shares outstanding.

For this fiscal year, management says earnings will be $2.60 a share, up 21%. That is an impressive gain, fueled by the combination of sales growth and stock buybacks. The $0.72 a share annual dividend provides a current yield of 1.4%.

The housing recovery is here to stay, making Lowe’s a very attractive long-term investment. However, after the recent 5% jump, the best strategy is to be patient and wait for a pull back. Buy Lowe’s below $50.

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