This article puts the two largest home improvement stores head to head to determine which stock is the better dividend stock to buy today. Home Depot and Lowe’s are titans in the industry. When you are looking to update your house or complete that overdue DIY project, you’re asking yourself which store has the better product and prices. Therefore, today, we figured we should ask that same question from an investment standpoint. Get ready. Buckle Up for another Dividend Stock Showdown featuring Home Depot (HD) and Lowes’ (LOW).

Image: Dividend Diplomats

About Home Depot and Lowe’s…Along with Recent news

Let’s talk a little about each of the companies in this section and review how the companies are performing in 2022.

Home Depot

Home Depot was founded in 1978. If you’re an Atlanta Falcons fan, chances are you know this since Arthur Blank was one of the co-founders. Since the founding, the company has grown from 1 to 2,300 stores across North America and become a powerhouse in the home improvement sector.

In 2022, Home Depot’s stock price has been crushed. The company is down over 24% YTD.

Home Depot had a very strong first quarter. The company released earnings on May 17, 2022. In the first quarter, the company had net income of $4.2 billion ($4.09 per share). This was a slight increase from the same period in the prior year, in which the company recorded net income of $4.1 billion ($3.86 per share). The company’s strong bottom line was bolstered by a strong top line. Sales grew 3.8% during the same period.

Clearly, the numbers are looking strong for Home Depot. So much so that the company increased its guidance for 2022. Here are the updated guidance figures, per the company’s website.

Lowe’s 

Lowe’s has a much longer history than Home Depot. Lowe’s first store open in 1921. The company is over 100 years old! Lowe’s has grown to over 2,200 stors in the United States and Canada over their 101 years of operations.

Like Home Depot, 2022 has not been kind to Lowe’s Corporation. The stock is down nearly 22% YTD!

Lowe’s also released its earnings as well. Recently, they released earnings on May 18, 2022, one day after Home Depot. The numbers were slightly worse than Home Depot. The company’s net income was $2.3 billion ($3.51 per share) in the first quarter. This was compared to $2.3 billion ($3.21 per share) during the same period last year. However, the big news is that the company’s sales declined 4%!  One other item to note is that there was not a chance in the company’s guidance. Lowe’s increased its outlook when reporting earnings for the previous quarter.

Massive Dividend Increases in 2022

The two stocks were not shy about rewarding shareholders in 2022. With such strong EPS growth (highlighted in the previous section, it only seems fitting that Home Depot and Lowe’s have both announced MASSIVE dividend increases this year.

Home Depot kicked off the dividend increase battle in February. At the end of the month, Home Depot announced a strong 15.2% dividend increase. Not too bad, Home Depot, not too bad. A double digit percent dividend increase. How sick is that?!

Lowe’s couldn’t stand by and watch their peers without one-upping them, right? Of course not. They told Home Depot to “Hold My Beer” and announced an AMAZING 31.3% dividend increase.

Both companies delivered great dividend increases to shareholders this year. Congrats to current shareholders. This is why you invest in great dividend growth stocks!

Which Store do Consumers Prefer to Shop for Home Improvement Supplies?

In addition to the individual sections about each stock, I thought it would be fun to run an informal, market research study on Twitter. That’s right, I took this question to the people!

The goal was to see which store consumers prefer to shop at when looking to buy home improvement supplies. Personally, I am a Home Depot guy. I shop at Home Depot first and will then consider Lowe’s, Ace Hardware or Menards if I can’t find what a specific item.  This won’t shape my final investment decision. However, understanding where consumers shop is important.

Let’s see the results of the poll. Interestingly, of the 283 votes during a 4 hour voting people, over 60% of participants stated the shop at Home Depot! The most shocking thing is that the results weren’t even close.  Another interesting data point to consider for sure.

Dividend Stock Screener

Now its time to run the two companies through the famous  Dividend Diplomat Stock Screener!  We use our simple, three step stock screener to determine if a company is currently an undervalued dividend growth stock. The three metrics (and the bonus metric) are:

1.) Price to Earnings Ratio (P/E): We look for the price to earnings ratio < the S&P 500 and the competition.

2.) Dividend Payout Ratio: The preferred dividend payout ratio is < 60%.  In fact, we believe the perfect payout ratio is between 40% and 60%.

3.) Dividend Growth Rate: Given we are dividend investing on our way to financial freedom, as we believe dividend income is the best source of passive income, we look at the 5 year dividend growth rate.  In addition, we review how many years the company has increased their dividend.

Bonus.) Dividend Yield: We review the company’s dividend yield once the stock passes the first three metrics of our stock screener.

Dividend Showdown: Home Depot and Lowe’s

Time for the results. Let’s see how these stocks perform head to head in our dividend stock screener. In this section, we will highlight each dividend stock’s metrics side by side to see if there is a clear winner…or if both companies are showing signs of undervaluation.

Metric #1: Price to Earnings Ratio (P/E)

The results are fascinating for the price to earnings ratio. Both stocks are showing signs of undervaluation compared to the S&P 500. However, when compared side by side, Lowe’s is currently trading at a significantly lower valuation compared to its peer.

Metric #2: Dividend Payout Ratio

Both companies pass our dividend stock metric, since we look for payout ratios less than 60%. Side by side though, Home Depot currently pays out a larger percentage of its earnings to shareholders. This will be obvious as well once we look at the bonus metric.

Metric #3: Dividend Growth History

This is where things get interesting. Lowe’s is a Dividend King. This company has crushed it and increased its dividend annually for six decades. Its hard to beat that dividend streak! Home Depot’s streak is much lower, albeit still solid, as they have only increased their dividend for 12 consecutive years.

Now, looking at their five year average dividend growth rate both companies are even. In fact, it is hilariously close, as both stocks have a five year average dividend growth rate of 18%! What are the odds of that?!

Bonus Metric: Dividend Yield

Last, but definitely not least, the dividend yield. Both stocks pay a dividend yield above the S&P 500. Home Depot’s yield is 86 basis points higher than their competitors.

That makes sense given the fact that Home Depot has a much higher dividend payout ratio than Lowes. Naturally, if you pay out a higher perecentage of your earnings, you’ll typically have a higher dividend yield.

Summary

Here is the question. Am I buying Home Depot, Lowe’s…or both after performing this analysis. Transparently, this stock analysis was eye opening to me. The analysis has showed me that both Home Depot and Lowe’s are undervalued dividend stocks that perform well through our dividend stock screener.

Of the two, though, I am leaning towards….Home Depot\ . Even though the company isn’t as cheap as Lowe’s, I like the company’s strong earnings results and sales growth. Further, the fact that the company pays a yield .86% higher than Lowe’s while maintaining a perfect dividend payout ratio is very telling to me.  The dividend growth is very strong as well. Even though they didn’t announce a 31% dividend increase this year like Lowe’s, their current yield is much higher. Lowe’s may be accelerating growth to remain in line with the competition’s yield.

I’m not running to buy either stock today. However, Home Depot is climbing up my dividend stock watch list. If there is another pullback in the market that causes their dividend yield to cross 2.75%…or even 3%, I will have no choice but to initiate a position.

What are your thoughts about Home Depot or Lowe’s? Which stock do you like better today? Do you agree with my conclusion to favor Home Depot over Lowe’s based on the results of this dividend stock showdown?