Lowe's Aims To Build Investor Interest On Share Buybacks, Dividend
Friday 12/03/2010 1:13 PM ET - Dow Jones News
By Maxwell Murphy
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Lowe's Corp. (LOW) hopes recently announced share buybacks and dividend increases will keep investors interested in its shares as it prepares for an extended period of slowing new-store growth.
On Tuesday, Lowe's told investors it could buy back as much as $18 billion in stock over the next five years. The buyback would more than halve the number of Lowe's shares outstanding if conducted at current market prices, though it will take fewer shares out of circulation if the company's stock price rises.
At the same time, Lowe's said it planned to return more of its profits to shareholders. Lowe's aims to pay as much as 35% of its earnings in dividends over five years. The company currently returns 31% of profits through dividends.
Lowe's aggressive buyback plan and dividend strategy comes as the Charlotte, N.C., company prepares for slower growth. Fueled by the housing bubble, Lowe's tripled the number of stores it runs in North America over the last 11 years. Now, faced with a struggling housing market, it is expecting slower growth.
The company's reduced expectations are evident in the way Lowe's is guiding investors. Lowe's opted not to offer financial guidance for fiscal 2011. Instead, it laid out a five-year plan for sales and earnings growth based on muted expectations for the economy.
"Employment will go lower before it goes higher, and home values will go down before they go back up," Lowe's Chief Financial Officer Robert Hull said, noting that the home improvement market may grow less than 1% in the next fiscal year. "Our share price is only going to grow to the extent the U.S. economy improves, unemployment goes down and housing rebounds."
The buyback, which is being funded from cash flow and borrowing, is the most eye-catching part of Lowe's plan. Starting in 2011, Lowe's intends to purchase an average of $3.6 billion of its shares annually for five fiscal years, starting smaller and getting larger. Lowe's has $3.4 billion in remaining authorization under the $5 billion buyback program it began early this year.
At current stock prices, the plan would reduce the company's shares outstanding to about 650 million from 1.38 billion. However, the buyback will more likely reduce the company's shares outstanding by about a third, based on Lowe's projections for earnings growth and the portion of that coming solely from the buybacks.
Lowe's shares were recently off 0.8% at $24.70 apiece. They are up about 11% since Tuesday's presentation and 5% higher year-to-date.
Howard Silverblatt, senior index analyst for Standard & Poor's, said Lowe's buyback plan is significant because it is being used to reduce the company's share count rather than offset dilution caused by stock options. "It's most definitely different," he said, "most companies have not reduced their shares."
Some analysts have questioned whether Lowe's new forecasts, including average same-store-sales growth of 4% a year and 20% compound annual growth of earnings per share, are achievable -- at least for the next couple of years. They say the home-improvement market would have to grow at an unusually quick clip for Lowe's to meet its projections.
Dan Binder, who follows Lowe's for Jefferies & Co., said the company likely won't meet its target for average annual same-store-sales growth -- at least next year -- given the state of the economy. That means the company will have to do even better in the latter years of its plan.
With this in mind, Lowe's plans on focusing more closely on costs and has a plan for grabbing a bigger share of the market by addressing customer needs with services and advice -- an enhancement of its current model. Hull says that will help it generate sales in an environment in which it can't open new stores.
"We've been growth dependent on new stores," Hull said. Now Lowe's needs to rely on its "ability to take share above" the growth of the home-improvement market, he said.