Home Depot (NYSE:HD) has grown tremendously over the last 11 years, with few interruptions. Since 2014, Home Depot’s profits and HD stock price have increased faster than the profits and stock of HD’s archrival, Lowe’s (NYSE:LOW).
However, Lowe’s profits have recently begun to increase faster than those of Home Depot. Meanwhile, the valuation of Home Depot stock remains higher than the valuation of Lowe’s shares. Falling interest rates could boost the prospects of both HD stock and Lowe’s stock. While I do not think current investors should sell HD stock, Lowe’s appears better-positioned for the near-term.
Home Depot, Lowe’s Battle for Growth
Much as analysts frequently compare Walmart (NYSE:WMT) to Target (NYSE:TGT), it’s difficult to discuss Home Depot stock without comparing it to Lowe’s stock.
HD stock still appears to be outperforming Lowe’s stock. The current Home Depot stock price stands at around $212 per share. That represents an increase of almost 35% from the lows of last December. During the same period, LOW stock has climbed by about 24%.
However, Lowe’s profits appear to be increasing faster than Home Depot’s at this point. This year, analysts, on average, expect HD’s earnings to rise 2.3%, compared to a 9.2% increase for Lowe’s. Both companies’ profit growth should accelerate next year. Still, over the two-year period, Lowe’s profits are expected to rise 18.3% versus an 8.8% gain for Home Depot.
Moreover, based on the stocks’ forward price-earnings (PE) ratio, Home Depot stock appears slightly more expensive. Currently, HD trades at about 19.4 times analysts’ average forward earnings estimate, while Lowe’s forward PE ratio comes in at around 15.6.
Dividends, Interest Rates Keep HD Stock a Hold
Still, the dividends of Home Depot stock continue to be more attractive than those of Lowe’s. The annual payout of HD stock has reached $5.44 per share, taking its yield to around 2.55%, ahead of Lowe’s current 2.15% return. The dividend of HD stock has also risen for six straight years, making its dividend quite stable and dependable.
HD stock’s dividend may now be the best reason to own Home Depot stock as the company settles into slow-growth mode. HD operates 2,290 stores across the U.S., Canada, and Mexico. While that constitutes a massive footprint, it is only six more stores than last year and 50 more than in 2008.
In terms of home-improvement stores, the North American market has become saturated. Lowe’s failed in its attempt to expand into Australia earlier in the decade. As a result, both HD and Lowe’s seem reluctant to consider opening new stores outside of North America.
Nonetheless, the market cap of HD stock has risen from just over $24 billion in October 2008 to over $234 billion today. Given this increase, I would encourage the long-term owners of HD stock to hold onto their shares. The company has managed to increase its profits and dividends without opening too many stores. Although HD’s profit growth is decelerating this year, analysts think its profits will continue to rise.
Moreover, interest rates have fallen substantially in recent months. That could help reignite the housing market, which has plateaued this year. It may also encourage more consumers to remodel their homes. Lower borrowing costs could also provide the needed incentive for the current owners of Home Depot stock to stay the course.
The Bottom Line on Home Depot Stock
Considering the valuation of HD stock and its gains since 2008, investors have little reason to either buy or sell this equity. Over the past 11 years, HD stock has risen by almost ten-fold on negligible store growth. This speaks to the strength of this company.
However, archrival Lowe’s profits are now growing more quickly. Moreover, on a forward basis, LOW stock trades at a discount to HD stock. In an environment of falling interest rates, I expect Home Depot stock to hold its own. However, in the near term, I do not expect Home Depot stock to outperform Lowe’s stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
