Home Depot (HD -0.39%) And Lowe’s (LOW 0.17%) have a combined market cap of over half a trillion dollars, so when they announce earnings, the market listens.

Both home improvement giants act as indicators for the overall economy, consumer health and the real estate market.

Here are some key takeaways from their recent reports and whether it’s worth buying one dividend stock or another now.

Image source: Getty Images.

Cuts to the guidelines

Wall Street hates uncertainty, so it’s not a good sign when companies don’t meet expectations.

Home Depot and Lowe’s just reported decent results, but both companies lowered their full-year forecasts.

Home Depot’s original guidance called for 1% diluted earnings per share (EPS) growth and 1% revenue growth. However, this fiscal year has 53 weeks, so including that extra week would mean comparable sales and earnings would decline slightly.

Home Depot’s updated second-quarter guidance calls for fiscal 2024 comparable sales to decline 3% to 4% and adjusted EPS to decline slightly despite the 53rd week benefit. Operating margin is expected to be 13.8% to 13.9%, compared to an original estimate of 14.1%.

Meanwhile, Lowe expects full-year 2024 revenue of $84 billion to $85 billion – a decline of 2 to 3 percent on a comparable basis. The company had forecast an operating margin of 12.6 to 12.7 percent and diluted earnings per share of $12 to $12.30, compared to $13.20 in fiscal 2023. The new forecast calls for revenue of $82.7 to $83.2 billion, an operating margin of 12.4 to 12.5 percent and adjusted earnings per share of $11.70 to $11.90.

In summary, Lowe’s revision is slightly worse than Home Depot’s, but both companies are experiencing margin compression. They forecast lower sales, adjusted earnings per share and operating margins than last year.

A worsening situation

Home Depot blamed higher interest rates, macroeconomic uncertainty and bad weather for weakness in home improvement projects in the spring. The low end of the updated forecast range is based on additional pressure on consumers in the second half of the year.

Lowe’s also continues to discuss interest rates and inflationary pressures. Customers are patient and are not quick to spend money on home improvement projects.

In other words, there is no catalyst that could provide a short-term economic stimulus.

With limited options during the pandemic, consumers shifted spending from services to goods, creating a surge in demand for Home Depot and Lowe’s products and changing the home improvement spending cycle. Consumers don’t always buy expensive items like grills and patio furniture, so the pandemic basically pulled many of those sales forward and concentrated them in a short period of time. The good news is that we’re a few years out of that unusual phase now. And Home Depot said it’s almost done working through that phase.

Lower interest rates and the fact that consumers have been postponing purchases since the pandemic could lead to a disproportionate sales boom. However, the timing of the recovery remains uncertain.

The context is crucial

Both companies are doing well during this downturn. Slightly lower sales and profits sound bad without context. But compared to record highs and a multi-year period of rapid growth, the results are still impressive.

The chart below shows why Home Depot and Lowe’s represent great value despite their slowing growth.

HD EPS diluted (TTM) data from YCharts

Both companies’ earnings are significantly higher than they were before the pandemic. They also have healthy payout ratios, suggesting that their dividends are affordable and they can continue to increase payouts even if earnings growth stalls.

In late March, Home Depot announced the acquisition of SRS Distribution for $18.25 billion, allowing the company to gain market share and invest in growth even during a recession. If the recession were worse, Home Depot would likely not make any major moves and would take a more cautious approach.

Home Depot and Lowe’s are both trading at a lower price-to-earnings ratio (P/E) than the S&P500 Index average of 29.2 – suggesting they represent good value for money. However, the 10-year median P/E ratios of both companies are around 22 or 23 – suggesting they are not exactly bargain territory either.

Home Depot is much larger than Lowe’s and is generally considered an industry leader – so it’s understandable why it’s valued higher. Home Depot also has a dividend yield of 2.4% compared to 1.9% for Lowe’s.

Take a long-term perspective with Home Depot and Lowe’s

Home Depot and Lowe’s are cyclical companies, but not So so cyclical that they fall apart in a recession.

Stable and rising dividends provide incentives to hold both stocks even during times of volatility. The longer consumers wait to renovate and purchase home improvement products, the more tension there is in the spring and the bigger the potential boom when interest rates start to fall.

When great companies offer good value and fall out of favor for short-term reasons, it’s usually a great buying opportunity. Home Depot and Lowe’s have what it takes to survive an economic slowdown. Investors should consider a 50/50 split between the two highest dividend-paying stocks.