Lowe's vs. Home Depot: Which Housing Stock Is the Better Buy?

Chances are, you've visited one of these two retailers lately...

Whether you need power tools, a new fridge, or even plants and soil for your garden, Home Depot (HD) and Lowe's (LOW) have you covered.

These two companies dominate the home-improvement market... and compete for the biggest piece of the pie.

Each company wants to grow faster and generate more profits. It's a natural rivalry.

Home Depot has 2,350 stores. It has gained an edge with the professional contractor... About 50% of its sales are from pros.

Lowe's, on the other hand, has about 1,750 stores. And it has historically focused on the do-it-yourself ("DIY") customer – with this group making up about 70% of sales.

Personally, I just go to whatever store is closest to me at the time. But investors have a tougher choice to make...

Home Depot and Lowe's have both been amazing capital compounders over the years. Both companies are impressive dividend-payers, too.

Fortunately, we just got some insight into which stock is the better buy.

Both home-improvement retailers reported second-quarter earnings in recent days. Let's go over the results and see which stock looks more attractive...

Investors Liked Earnings for Both Home-Improvement Stocks

Home Depot reported earnings on Tuesday. On the surface, it wasn't the best quarter...

Sales were $45.3 billion and net earnings were $4.6 billion – both below expectations. But the market didn't seem to mind the "miss." In fact, shares of Home Depot were up more than 3% on the day.

Investors liked that Home Depot maintained its guidance for the fiscal year, even though consumers are cautious about spending today. The company also posted other encouraging numbers...

Same-store sales (a key metric for retailers) were positive for the first time in two years, up 1% from a year ago. And transactions above $1,000 were up 2.6% year over year.

Lowe's released its earnings this morning. It did a touch better than Home Depot...

Sales were $23.9 billion for the quarter – in line with expectations. Net earnings were $2.4 billion, which was higher than expected. Also, management raised its sales guidance for the full year.

The big news for Lowe's, though, was the announcement of a $8.8 billion deal to buy Foundation Building Materials... a company that distributes building products like drywall, metal framing, and insulation.

This is important because Foundation Building Materials mostly sells to large residential and commercial clients. Again, Lowe's has been trailing Home Depot in the professional market. But it's making moves to attract more business from professionals.

Lowe's Chief Executive Marvin Ellison says the professional market has a total addressable market of $250 billion.

Home Depot has been making acquisitions, too – it bought building-products company GMS for $5.5 billion earlier this summer. But with this deal, Lowe's is making up ground.

The market loved the announcement. Lowe's stock rose 4% at the open.

Home Depot and Lowe's are in a race to capture the most market share between DIY and pro customers.

Fortunately, a few drivers within the industry should help both companies – even in an uncertain environment...

A Win-Win Market for Home-Improvement Projects

First, homes in the U.S. are downright old.

According to the latest data we have, the median age of owner-occupied homes is 40 years.

Older homes need more renovations and upkeep. That's good news for Home Depot and Lowe's... It means more roof replacements, HVAC upgrades, plumbing repairs, electrical work, and kitchen remodels.

Second, high mortgage rates are keeping families "locked into" their homes.

The chart below comes from online real estate brokerage Redfin. It shows the estimated number of buyers and sellers in the housing market over the past decade-plus. As you can see, there were a lot more buyers than sellers in 2020 and 2021.

But as of June, we're seeing many more sellers in the market – nearly 500,000, to be specific. Take a look...

Many families locked in low mortgage rates during the pandemic. They don't want to trade in that attractive rate for a higher one today.

This interest-rate setup comes with pros and cons...

On one hand, folks will be more likely to stay put and fix up their current houses. That's a boost for the DIY segment.

On the other hand, they may also delay taking on bigger home-renovation projects due to higher borrowing costs. And low housing turnover might mean less remodeling for the market – which may hurt the pro segment a bit.

Fortunately, rates should come down over the next several months. The market is betting on it. According to prediction market Polymarket, the odds of the Federal Reserve cutting interest rates in September are more than 70%.

If the Fed's rates come down – bringing mortgage rates with them – it could be a win-win situation...

As the housing market thaws out, we'll see more sellers sprucing up homes to attract buyers... and more buyers fixing up homes they've just bought. The pro segment will share more of the benefits.

And of course, lower rates will give consumers the confidence to open their wallets – and spend more at Home Depot and Lowe's.

That brings us to the third driver... near-record levels of household wealth.

Most families get their net worth from their home value or from the stock market. And both home prices and the S&P 500 Index are near record highs. Since 2019 alone, home-equity values have risen 50%.

This gives many homeowners plenty of money to fund their home-improvement projects. And that's before any changes to interest rates.

The catch is, there's a lot of uncertainty in the economy today. But today's setup is bullish for the home-improvement sector.

Add everything up, and the total U.S. home-improvement market is projected to grow by 3.5% in 2026.

By 2029, the market should hit a massive $688 billion. And according to the Home Improvement Research Institute, consumer spending will drive roughly two-thirds of that growth.

Home Depot and Lowe's will continue to fight it out – and see which retailer can capture the biggest market share.

The Best Dividend-Paying Stock for Today's Housing Market

As I mentioned earlier, both Home Depot and Lowe's have been fantastic stocks to own...

Home Depot has returned nearly 1,500% to shareholders (with dividends reinvested) over the past two decades. That's a massive 14.8% a year.

Lowe's has trailed, but only slightly. It has a total return of 970% over that stretch, or 12.6% a year.

According to our proprietary Stansberry Score, this trend could soon reverse... with Lowe's taking the lead.

Home Depot gets a Stansberry Score of 75, with a B grade for financials, A for capital efficiency (the hallmark metric of Stansberry Research), and a C for valuation.

That's a good score. On the other hand, Lowe's grades are better, receiving an A for financials and capital efficiency and a B for valuation...

One thing helping Lowe's today is its dividend history...

Home Depot has increased its annual dividend payment for 16 consecutive years. Lowe's has increased it for 60 consecutive years – earning it the rare title of "Dividend King."

Just as important, though, Lowe's has a favorable "dividend payout ratio." It only pays out 39% of earnings to its dividend... while Home Depot has a "dividend payout ratio" of 66%.

That means Lowe's is in a better spot to keep raising its dividend going forward.

To be clear, both home-improvement retailers should be attractive to income investors. I don't think either company is at risk of cutting their dividend. But Lowe's does have a slight edge (and a better overall dividend track record).

In the end, both stocks look promising after recent earnings. But our Stansberry Score thinks Lowe's is the better bet.

Just note... with lower valuation grades on both stocks, consider keeping them on your watch list for now. You may get a better investment setup if you're able to buy on a dip.

Good investing,

Jeff Havenstein