While a prudent use of corporate debt is to fund growth (as opposed to dividends and/or stock buybacks), Lowe’s provides an illustrative look at how a company can also choose to increase its borrowings to reward shareholders.
Commentary
- While it may be a prudent policy to return cash to shareholders, what about borrowing money for this purpose?
- As evident below, Lowe’s has borrowed a substantial amount to fund stock buybacks & dividends over the years. This has worked for LOW shares, and we can also see that the company’s interest coverage ratio (EBITDA/interest expense) remains a comfortable 12x for the LTM period even though management has been increasing its debt load since 2020. It is further notable that management could use cash from operations to quickly de-leverage should the need arise.
- While this type of financial engineering may not push Lowe’s into bankruptcy, it does encourage investor dependency on this strategy.
- For this reason, it is our opinion that it would be better both for Lowe’s & its investors if management would seek to drive stock performance primarily with long-term profit growth, with less emphasis on financial engineering.
