As Federal Reserve Chairman Jerome Powell prepares for potential interest rate cuts, savvy investors should consider dividend-paying stocks that are particularly sensitive to changes in interest rates. Three prominent housing-related retailers - Home Depot (HD), Lowe’s (LOW), and Tractor Supply Company (TSCO) - are poised to benefit significantly from such monetary policy shifts.
In his recent semiannual testimony before Congress, Powell highlighted the Fed’s ongoing success in bringing down inflation, suggesting that forthcoming rate cuts could provide much-needed relief to consumers struggling with high costs. He underscored the housing sector’s unique sensitivity to interest rates, indicating that it stands to gain the most from these anticipated cuts. However, Powell also pointed out that the Fed cannot address broader issues like persistent housing shortages that continue to affect the market.
Adding to their appeal, analysts note that these three companies are expected to benefit from an active hurricane season, which could drive demand for their products and services. Tractor Supply, Lowe’s, and Home Depot “have all typically experienced a near-term sales boost from hurricane prep activity” due to increased demand for lumber and generators, said Mizuho analyst David Bellinger. Following major storms, these suppliers also benefit from “a more substantial and potentially extended clean-up and rebuilding process,” he said.
With the potential for growth amid favorable economic conditions and an active storm season, HD, LOW, and TSCO emerge as top picks for investors seeking rate-sensitive dividend stocks. Let’s take a closer look at these names.
1. Home Depot
With a market capitalization of $356.75 billion, Home Depot (HD) is the world’s largest home improvement retailer, providing customers with building materials, home improvement products, lawn and garden items, and more.
Shares of Home Depot have gained 3.8% on a year-to-date basis, underperforming the S&P 500 Index’s ($SPX) gain of 17.7% during the same time frame.
On June 26, DA Davidson upgraded Home Depot to “Buy” from “Neutral” with a price target of $395, up from $352. The firm cited several reasons for upgrading the stock, including Home Depot shares being below their all-time high from December 2021 and their 52-week high, accelerating existing home prices, improving industry trends and comparisons, the company widening the margin gap, and the prospect of a lower rate environment.
Home Depot has a consistent dividend history. On June 13, the company paid its shareholders a quarterly dividend of $2.25 per share, marking the 149th consecutive quarter it has distributed a cash dividend. Shares of HD currently yield 2.50%, surpassing the sector median of 2.27%. The company also boasts a healthy 5-year dividend growth rate of approximately 13%. Furthermore, the sustainability of HD's dividends can be assessed through its current dividend payout ratio of 58.22%, reflecting a balanced strategy in distributing earnings while preserving sufficient capital for future growth. Notably, Home Depot has raised its dividend for 14 consecutive years.
Home Depot reported its first-quarter earnings results in May. In Q1, HD posted a 2.8% decrease in comparable store sales and a 3.2% decline in U.S. comparable store sales, attributed to a delayed start to the spring season and reduced consumer spending on discretionary projects due to elevated interest rates and constrained budgets. Revenue fell 2.4% year-over-year to $36.4 billion, missing Wall Street’s expectations by $250 million. HD posted EPS of $3.63 for the quarter, edging out the consensus estimate of $3.59, but down from $3.82 a year ago.
At the same time, there were several positive highlights during the first quarter. For example, the company announced the opening of 12 new stores, despite many retailers scaling back on expansion projects due to high rents and elevated interest rates. Also, HD improved its gross margin to 34.1% from 33.7% a year ago.
The retailer also continued to advance its strategic priorities, focusing on expanding its Pro market share. The Pro customer segment includes professional renovators, general contractors, handymen, property managers, and others, with Home Depot estimating a total addressable market of about $250 billion.
On June 18, the company completed the acquisition of SRS Distribution for a total enterprise value of $18.25 billion. SRS Distribution holds a leading position in three trade verticals, catering to roofers, pool contractors, and landscape professionals. The acquisition will allow Home Depot to leverage SRS’ expertise and customer base in these specialized verticals, facilitating HD’s expansion of its market share within the Pro customer segment.
Looking ahead, management reiterated their fiscal 2024 guidance, which forecasts only 1% growth in total sales and a 1% decline in comparable sales, indicating their cautious outlook on the U.S. consumer for 2024.
According to Wall Street projections, HD is expected to achieve 1.39% year-over-year revenue growth to $154.78 billion in fiscal 2024, while earnings are forecasted to rise by 1.13% year-over-year to $15.28 per share.
In terms of valuation, the stock currently trades at 23.57 times forward earnings and 22.21 times next year’s earnings. For comparison, shares have traded at an average P/E ratio of 21.71x over the past five years. Given this, there is no discount at all when it comes to shares of HD. From a forward EV/EBITDA standpoint, shares are trading at 16.22x, significantly higher than the sector’s median of 9.75x and their 5-year average of 15.17x.
Overall, analysts have deemed Home Depot stock a “Strong Buy,” with a mean target price of $384.93, which indicates an upside potential of about 7% from Friday’s closing price. Out of 29 analysts covering the stock, 21 recommend a “Strong Buy,” one advises a “Moderate Buy” rating, and the remaining seven give a “Hold” rating.
2. Lowe’s Companies
Founded in 1921, Lowe’s Companies (LOW) is a retailer specializing in a portfolio of home improvement products, boasting a century-long presence in the industry. With its extensive history, LOW has achieved a market capitalization exceeding $133 billion and operates approximately 1,700 locations across the U.S., solidifying its position as the second-largest competitor in the space, trailing only behind industry giant Home Depot.
Shares of Lowe’s Companies have risen 5.2% on a year-to-date basis, lagging behind the SPX’s gain over the same period.
On June 11, Lowe’s Companies announced the promotion of Jennifer Wilson to senior vice president and chief marketing officer, effective June 10. In her new position, Wilson will be responsible for strategic brand and product marketing, loyalty and personalization initiatives, promotional planning, creative direction, media, and Lowe’s retail media network. As CMO, she will also establish a new customer experience integration organization aimed at providing seamless end-to-end customer journeys to enhance Lowe's consumer satisfaction.
LOW retains its status as a dividend king, having recently increased its dividend by 4.5%. On May 31, Lowe’s declared a quarterly dividend of $1.15 per share, up from the previous dividend of $1.10, payable to its shareholders on August 7. Since its IPO in 1961, Lowe’s has distributed a cash dividend every quarter and has consistently raised the dividend for over 60 consecutive years. During the most recent quarter, the company repurchased around 3.0 million shares for $743 million.
Its annualized dividend of $4.60 per share results in a dividend yield of 1.97%, slightly below the sector median of 2.27%. Despite the modest dividend yield, Lowe’s has shown robust growth, increasing its dividend at a CAGR of 19.84% over the last 10 years, well surpassing the sector median of 8.02%. It’s worth noting that the company’s dividend growth remains well-covered as the current dividend payout ratio stands at approximately 35%.
On May 21, Lowe’s released its Q1 earnings, and the results were somewhat mixed. Lowe’s first-quarter revenue declined 4.3% year-over-year to $21.4 billion, and comparable sales for the quarter dropped 4.1%. However, sales topped the consensus estimate for a 5.6% decline. Also, its top line exceeded expectations by $300 million. Earnings per share came in at $3.06, surpassing expectations by $0.11, but still lower than last year’s Q1 EPS of $3.77.
As of May 3, Lowe’s operated 1,746 stores, encompassing 194.9 million square feet of retail selling space. Gross margin was 33.2% of sales in the first quarter, down 49 basis points from last year, primarily due to ongoing supply chain investments, early spring traffic promotions, and a modest decline in credit revenue.
Notably, LOW generated $3.9 billion in free cash flow. Its balance sheet remains relatively safe, despite carrying $34.6 billion in long-term debt, as the company maintains adequate leverage ratios. Its 2.9x Net debt/EBITDA ratio and 0.9x debt ratio are within a healthy range.
The company also affirmed its full-year 2024 outlook. Management anticipates total sales of about $84 billion to $85 billion, with comparable sales expected to decline by -2% to -3% compared to a year ago, and adjusted EPS ranging from $12.00 to $12.30.
Analysts tracking the company anticipate a 7.35% year-over-year decline in its profit to $12.23 per share for fiscal 2025, with revenue expected to drop 2.18% year-over-year to $84.50 billion.
In terms of valuation, LOW appears to be trading close to fair value. The stock is trading at 19.13x forward earnings, which is close to its five-year average P/E ratio of 17.52x. Additionally, LOW has a forward price/cash flow ratio of 12.41x, which is lower than its five-year average of 13.44x.
Analysts have a consensus rating of “Moderate Buy” on Lowe’s stock, with a mean target price of $246.87, which indicates an upside potential of about 5.5% from the stock’s Friday close. Out of 30 analysts covering the stock, 15 analysts recommend a “Strong Buy,” one advises a “Moderate Buy” rating, and the remaining 14 recommend a “Hold.”
3. Tractor Supply Company
Valued at a market cap of $29.22 billion, Tractor Supply Company (TSCO) operates as a rural-focused retailer, akin to a smaller-scale Home Depot, with strategically located stores catering to communities passionate about outdoor living and animal care.
Shares of Tractor Supply Company have rallied about 26% on a year-to-date basis, outperforming the S&P 500 Index’s gain over the same period.
Tractor Supply has a long history of paying dividends, boasting a track record of increasing dividends for 12 consecutive years. In early February, Tractor Supply increased its quarterly dividend per share by 6.8% to the current rate of $1.10. TSCO’s annualized dividend of $4.40 equates to a forward yield of 1.62%, which is lower than the sector median of 2.25%. However, the company has a 40.80% payout ratio, allowing it to allocate funds towards supply chain optimization, share repurchases, and dividend growth.
Notably, TSCO has increased its dividend at a CAGR of 22.72% over the last 10 years, significantly outpacing the sector median of 7.62%. Moreover, the company has repurchased over a fifth of its shares over the past decade. It repurchased around 0.5 million shares of its common stock for $117.4 million in the first quarter.
Tractor Supply Company reported its financial results for the first quarter of fiscal 2024 on April 25. Net sales rose 2.9% year-over-year to a record $3.39 billion, driven by new store openings and growth in comparable store sales, but fell short of expectations by $10 million. Notably, comparable store sales increased by 1.1%, compared to a 2.1% rise in the previous year’s first quarter, but significantly exceeded expectations of 0.5%. The primary driver behind this solid result was the Neighbor’s Club loyalty program, which boasts over 34 million members benefiting from personalized offers and incentives. Diluted EPS grew 10.9% year-over-year to $1.83 in the quarter, beating analysts’ expectations by $0.11.
Gross profit margin expanded by 50 basis points to 36.0% for the quarter, driven by reduced transportation costs, effective cost management, and competitive pricing strategies aimed at attracting budget-conscious consumers. It is also important to note that TSCO maintains a healthy balance sheet, with an anticipated 2024 net leverage ratio of less than 1x EBITDA.
Looking forward to fiscal 2024, the company anticipates sales ranging from $14.7 billion to $15.1 billion, compared to $14.56 billion in 2023. Comparable store sales are projected to range from a 1.0% decline to a 1.5% increase. The retailer also expects earnings of $9.85 to $10.50 per share.
The results and outlook for 2024 prompted a wave of price-target increases, with Goldman Sachs, UBS, Morgan Stanley, Raymond James, and BNP Paribas among the brokerage firms raising their TSCO targets by 6% to 20%.
Analysts tracking the company forecast a 2.48% year-over-year increase in its profit to $10.34 per share for fiscal 2024. Moreover, Wall Street anticipates TSCO’s revenue to rise 2.90% year-over-year to $14.98 billion in fiscal 2024.
In terms of valuation, the stock is trading at 26.10 times the consensus earnings estimate for 2024, which is higher than both the sector median of 15.67x and its own five-year average of 22.47x.
Overall, Tractor Supply stock has a consensus “Moderate Buy” rating. Out of the 31 analysts covering the stock, 13 recommend a “Strong Buy,” one advises a “Moderate Buy,” 12 suggest a “Hold,” one advises a “Moderate Sell,” and the remaining one gives a “Strong Sell” rating. The stock trades at a premium to its mean price target of $263.35, but the Street-high target price of $318.00 suggests an upside potential of about 17.3%.
