5 Charts That Show Which Home Improvement Retailer Can Help You Build Your Portfolio


A big story over the past two years has been the rise in house prices. Many variables are in play. Tight supply is one. An influx of people moving to more desirable locations is another. But rising interest rates threaten to dampen the housing market. There are even fears that some of the recent gains could be reversed.

This pushed home improvement retailers Residence Deposit (NYSE:HD) and Lowe’s (NYSE: LOW) well below the highs reached at the end of last year. But those fears could give investors an opportunity. Is one of them better than the other? Wall Street thinks so. And these graphs show why.

Image source: Getty Images.

One is always more expensive than the other

Over the past decade, Wall Street has agreed to pay a higher valuation for Home Depot than for Lowe’s. As the valuation of the overall stock market swung, the two home improvement stores performed an incredibly predictable dance. Resembling the poles of two magnets repelling each other, the price/sales ratios kept their distance.

PS HD Ratio Graph

PS HD report given by Y-Charts

It is also always more profitable

A good explanation is the profitability of Home Depot. During that decade, its operating margin remained at least one-fifth higher than that of Lowe’s. The company recently warned that profit margins will suffer from increased spending.

Management went so far as to charter its own freighter to avoid the global supply chain. Historically, Lowe’s has spent more on expenses such as sales, marketing, and administrative functions such as human resources and accounting. In 2021, the difference was around just over 2% of sales, roughly the operating margin gap.

HD Operating Margin Chart (TTM)

HD operating margin (TTM) given by Y-Charts

Contrary to history, Lowe’s recent update was optimistic. In February, it raised its estimates for the full year of sales and profits.

And he’s in a better position to manage his debt

One area where Lowe’s looks more appealing is the amount of debt it carries relative to Home Depot. It has $30 billion of combined short- and long-term debt on its balance sheet. Home Depot has $45 billion.

But digging a little deeper reveals that Home Depot is in a stronger financial position, generating nearly double earnings before interest and taxes (EBIT). This means that its ratio multiplied by interest earned – the number of times EBIT can cover annual interest payments – is much higher.LOW Times Interest Earned (TTM) Chart

LOW Times Interest Earned (TTM) given by Y-Charts

He also grew faster

All of this overlooks the one metric that many investors value above all others: growth. Here too, Home Depot wins. Neither company is in hypergrowth mode, and both have benefited greatly during the pandemic from consumers’ willingness to spend on housing. But over the past five and ten years, Loew’s revenue has grown at a slower pace.HD Revenue Graph (TTM)

HD Turnover (TTM) given by Y-Charts

Which one pays you the most for owning stocks?

Investors might expect Lowe’s to make up for these perceived shortcomings by paying a higher dividend to shareholders. They would be wrong. Home Depot’s distribution far exceeds that of Lowe’s. It has done so for most of the past decade.

HD Dividend Yield Chart

HD dividend yield given by Y-Charts

This does not take into account all the ways of returning capital to shareholders. Lowe’s has done a lot more stock buybacks in recent years. In fact, he’s repurchased 17% of outstanding shares in the past three years alone. Home Depot only bought 6%.

Lowe’s also has more room to increase the dividend going forward. It returns less than a quarter of profits to shareholders in the form of dividends. For Home Depot, the number is about four-fifths. Yet both can easily do so for the foreseeable future.

Is the changing of the guard near?

If you’re looking to add one of the big-box home improvement stores to your portfolio, the historical metrics make a compelling argument for Home Depot over Lowe’s. But that could change. A different outlook for 2022 and an aggressive buyout program make Lowe look like the old Home Depot that Wall Street fell in love with.

Both offer investors exposure to an industry at the heart of the American economy. With strong capital return programs, strong margins and manageable debt, there’s no wrong choice. But Home Depot has proven it can perform over time. That’s why I would lean towards him if I had to choose. Of course, there is no rule against buying both.

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Jason Hawthorne has no position in the stocks mentioned. The Motley Fool owns and recommends Home Depot. The Motley Fool recommends Lowe’s. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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