# Lowe’s Cos. Inc. (LOW)

## Dividend Discount Model (DDM)

Intermediate level

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Dividends are the cleanest and most straightforward measure of cash flow because these are clearly cash flows that go directly to the investor.

### Intrinsic Stock Value (Valuation Summary)

Lowe’s Cos. Inc., dividends per share (DPS) forecast

US\$

Year Value DPSt or Terminal value (TVt) Calculation Present value at 13.54%
0 DPS01 1.85
1 DPS1 2.38 = 1.85 × (1 + 28.51%) 2.09
2 DPS2 2.96 = 2.38 × (1 + 24.32%) 2.29
3 DPS3 3.55 = 2.96 × (1 + 20.13%) 2.43
4 DPS4 4.12 = 3.55 × (1 + 15.95%) 2.48
5 DPS5 4.60 = 4.12 × (1 + 11.76%) 2.44
5 Terminal value (TV5) 289.17 = 4.60 × (1 + 11.76%) ÷ (13.54%11.76%) 153.28
Intrinsic value of Lowe’s Cos. Inc.’s common stock (per share) \$165.01
Current share price \$116.28

Based on: 10-K (filing date: 2019-04-02).

1 DPS0 = Sum of the last year dividends per share of Lowe’s Cos. Inc.’s common stock. See details »

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

### Required Rate of Return (r)

 Assumptions Rate of return on LT Treasury Composite1 RF 2.21% Expected rate of return on market portfolio2 E(RM) 11.47% Systematic risk of Lowe’s Cos. Inc.’s common stock βLOW 1.22 Required rate of return on Lowe’s Cos. Inc.’s common stock3 rLOW 13.54%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

3 rLOW = RF + βLOW [E(RM) – RF]
= 2.21% + 1.22 [11.47%2.21%]
= 13.54%

### Dividend Growth Rate (g)

#### Dividend growth rate (g) implied by PRAT model

Lowe’s Cos. Inc., PRAT model

Average Feb 1, 2019 Feb 2, 2018 Feb 3, 2017 Jan 29, 2016 Jan 30, 2015 Jan 31, 2014
Selected Financial Data (US\$ in millions)
Cash dividends declared 1,500  1,324  1,169  991  858  741
Net earnings 2,314  3,447  3,093  2,546  2,698  2,286
Net sales 71,309  68,619  65,017  59,074  56,223  53,417
Total assets 34,508  35,291  34,408  31,266  31,827  32,732
Shareholders’ equity 3,644  5,873  6,434  7,654  9,968  11,853
Financial Ratios
Retention rate1 0.35 0.62 0.62 0.61 0.68 0.68
Profit margin2 3.25% 5.02% 4.76% 4.31% 4.80% 4.28%
Asset turnover3 2.07 1.94 1.89 1.89 1.77 1.63
Financial leverage4 9.47 6.01 5.35 4.08 3.19 2.76
Averages
Retention rate 0.64
Profit margin 4.63%
Asset turnover 1.86
Financial leverage 5.14

Dividend growth rate (g)5 28.51%

Based on: 10-K (filing date: 2019-04-02), 10-K (filing date: 2018-04-02), 10-K (filing date: 2017-04-04), 10-K (filing date: 2016-03-29), 10-K (filing date: 2015-03-31), 10-K (filing date: 2014-03-31).

2019 Calculations

1 Retention rate = (Net earnings – Cash dividends declared) ÷ Net earnings
= (2,3141,500) ÷ 2,314 = 0.35

2 Profit margin = 100 × Net earnings ÷ Net sales
= 100 × 2,314 ÷ 71,309 = 3.25%

3 Asset turnover = Net sales ÷ Total assets
= 71,309 ÷ 34,508 = 2.07

4 Financial leverage = Total assets ÷ Shareholders’ equity
= 34,508 ÷ 3,644 = 9.47

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.64 × 4.63% × 1.86 × 5.14 = 28.51%

#### Dividend growth rate (g) implied by Gordon growth model

g = 100 × (P0 × rD0) ÷ (P0 + D0)
= 100 × (\$116.28 × 13.54% – \$1.85) ÷ (\$116.28 + \$1.85) = 11.76%

where:
P0 = current price of share of Lowe’s Cos. Inc.’s common stock
D0 = the last year dividends per share of Lowe’s Cos. Inc.’s common stock
r = required rate of return on Lowe’s Cos. Inc.’s common stock

#### Dividend growth rate (g) forecast

Lowe’s Cos. Inc., H-model

Year Value gt
1 g1 28.51%
2 g2 24.32%
3 g3 20.13%
4 g4 15.95%
5 and thereafter g5 11.76%

where:
g1 is implied by PRAT model
g5 is implied by Gordon growth model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 28.51% + (11.76%28.51%) × (2 – 1) ÷ (5 – 1) = 24.32%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 28.51% + (11.76%28.51%) × (3 – 1) ÷ (5 – 1) = 20.13%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 28.51% + (11.76%28.51%) × (4 – 1) ÷ (5 – 1) = 15.95%