Is Lowe's Companies' $5 Billion Buyback Plan a Smart Move?

Source: Lowe's.

During the past two years, home-improvement retailer Lowe's has performed extremely well for shareholders, with the stock doubling as conditions in the housing market have helped support its business. Some of those gains have come from share repurchases that Lowe's has done in recent years. In February, Lowe's announced that it would add another $5 billion to its stock buyback program, supplementing the $1.3 billion remaining on its previous share-repurchase authorization.

With competition against rival Home Depot and smaller niche players in the home-improvement space growing fiercer, though, some are questioning whether stock buybacks are the best way for Lowe's to use its capital. Let's take a look at Lowe's record of share repurchases to see whether they're likely to be the best move for the company going forward.

How Lowe's has used buybacks in the past
Lowe's hasn't historically been a heavy user of share repurchases. Looking back 10 years, Lowe's made some ill-timed buybacks just as the housing boom was coming to an end, and its optimism turned out to be unrealistic as shares plunged within a year or two of its purchases. During the initial fallout from the financial crisis, Lowe's remained gun-shy, with very little repurchase activity during 2008 and 2009.

LOW Chart

LOW data by YCharts.

In 2011, though, Lowe's started committing to buybacks in a big way, and its timing turned out to be perfect in that regard. After the housing market struggled to participate in the broader economic recovery during the first few years after the financial crisis, Lowe's correctly predicted that housing would pick up, and big buys in 2011 and 2012 preceded the run-up in the home-improvement retailer's shares.

Should Lowe's spend its money elsewhere?
Returning capital to shareholders through a stock buyback usually juices the share price -- at least temporarily. But from a longer-term perspective, it's far more important to put money to work in the most profitable way possible.

Source: Lowe's.

Lowe's has done a good job in targeting do-it-yourself customers with its offerings, but one of the areas in which Lowe's has traditionally trailed Home Depot is in serving contractors and other business customers. Recently, though, Lowe's has taken steps to change that shortcoming, promoting its ProServices program that aims directly at its business customers.

Lowe's has generated faster growth from ProServices for 12 straight quarters than it's seen in the rest of its business, suggesting that ongoing buybacks haven't hurt its growth potential. Nevertheless, taking away opportunities to grow ProServices even more quickly could hold back Lowe's in its fight against Home Depot in the long run.

The other big potential growth area for Lowe's is overseas. Past forays into foreign markets under the Lowe's name have proven underwhelming, as the company has faced major challenges in building operations from the ground up in already-competitive markets. In August, CEO Bob Niblock said that any expansion plans in the future would likely focus on buying out existing companies in key foreign markets rather than trying to start from scratch. Lowe's hasn't confirmed rumors that the company might seek to enter the Brazilian home-improvement market, but spending too much on buybacks could leave Lowe's in a tough position if it wants to make major strategic acquisitions with cash it no longer has.

Source: Lowe's.

Lowe's dividend: Due for a boost?
The other logical place for Lowe's to funnel more money is its dividend to shareholders. With a yield of 1.7%, Lowe's pays less than Home Depot's 2% payout.

Yet, Lowe's already boosted its dividend recently, making its quarterly payout $0.23 per share compared to $0.18 previously. Despite having plenty of room to make further increases, Lowe's strategy for returning capital to shareholders already appears relatively balanced.

Look for more buybacks from Lowe's
Perhaps, most importantly, Lowe's still had $4.3 billion left for repurchases as of June 30. Given how high the stock has risen in recent months, Lowe's might prefer to exercise restraint in order to wait for a better price at which to do its buybacks. Yet, if the company's projection on the macroeconomic environment proves correct, then the gains that Lowe's stock has seen could turn out to be small compared to where shares could climb in the years to come.

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