Home Depot and Lowe's: Undervalued Opportunities in a Stabilizing Housing Market?

The U.S. housing market, long shadowed by high interest rates and a "lock-in effect," is showing early signs of stabilization. As UBS analysts highlight, home improvement retailers like Home Depot (HD) and Lowe's (LOW) are emerging as key indicators of broader economic resilience. Despite modest first-quarter sales growth—1% for Home Depot and flat to slightly positive for Lowe's—UBS remains cautiously optimistic. The firm's bullish stance hinges on the potential for a housing market rebound later in 2025, which could catalyze earnings growth for these retailers. This analysis explores whether UBS's call is justified, focusing on dividend growth, valuation metrics, and the strategic expansion of Pro segments in a post-rate-cut environment.

Dividend Growth: A Tale of Two Dividend Aristocrats

Both Home Depot and Lowe's have long been staples for income-focused investors, but their dividend trajectories diverge. Home Depot's 2.3% yield, supported by a 60% payout ratio, reflects a balance between shareholder returns and reinvestment. Over the past five years, its dividends have grown at an average of 11.2%, though this pace has slowed to 7.66% in 2025. By contrast, Lowe's offers a 1.8% yield with a more conservative 39% payout ratio, leaving ample room for future increases. Its 20.3% five-year dividend growth rate far outpaces Home Depot's, and a recent 4% hike to $1.20 per share underscores management's confidence in its Total Home strategy.

For investors prioritizing long-term income, Lowe's appears more compelling. Its lower payout ratio and faster growth trajectory suggest greater flexibility to sustain or accelerate payouts, even if earnings face near-term headwinds. Home Depot's larger scale and diversified revenue base provide stability, but its higher payout ratio limits upside potential.

Valuation Metrics: Is the Market Pricing in a Housing Recovery?

UBS's optimism is partly rooted in the idea that Home Depot and Lowe's are “high-quality bellwethers” for the home improvement sector. Their forward price-to-sales (P/S) ratios—2.27 for Home Depot and 2.27 for Lowe's—suggest both are trading in line with industry expectations. However, their forward P/E ratios tell a different story. Home Depot's 22.31X premium reflects its market leadership and brand strength, while Lowe's 16.58X appears more attractively valued.

The disparity in valuations highlights a key strategic question: Is Home Depot's premium justified by its scale and Pro segment dominance, or does Lowe's cheaper valuation offer better upside potential? UBS analysts argue that both companies are well-positioned to benefit from a housing market rebound, but Lowe's disciplined capital allocation and lower valuation make it a more compelling buy for investors seeking growth.

Pro Segment Expansion: The Engine of Long-Term Resilience

The Pro segment—serving professional contractors and large-scale construction projects—is a critical differentiator for both retailers. Home Depot's 9.4% year-over-year Pro revenue growth in Q1 2025, driven by its $5.5 billion GMS acquisition, has solidified its dominance in this space. The expanded logistics network and specialized services (e.g., roofing, pool, and landscaping) position it to capture a larger share of high-margin projects.

Lowe's, meanwhile, is aggressively expanding its Pro offerings through strategic acquisitions like Artisan Design Group and digital tools such as MyLowe's Pro Rewards. Its Total Home strategy emphasizes store productivity, rural-specific assortments, and AI-driven tools to enhance contractor engagement. While Home Depot's scale gives it an edge in logistics, Lowe's agility and lower gross margin (33.32% vs. Home Depot's 35.3%) suggest it could outperform in a competitive pricing environment.

Post-Rate-Cut Dynamics: Margin Stability and Demand Catalysts

The anticipated December 2025 rate cuts could act as a tailwind for both companies. Lower borrowing costs would likely stimulate demand for large-scale renovations and new construction, directly benefiting their Pro segments. Home Depot's supply chain efficiencies and U.S.-sourced inventory (50%+ for Home Depot, 60% for Lowe's) provide a buffer against margin compression from tariffs or inflation. However, Lowe's lower gross margin and ongoing Pro market share challenges could pose risks if cost pressures persist.

UBS analysts note that both retailers are managing short-term cost pressures by absorbing incremental expenses to maintain price competitiveness. This strategy, while sustainable in the near term, could strain margins if sustained. Investors should monitor how each company balances reinvestment in Pro capabilities with margin preservation.

Investment Implications: Buy, Hold, or Wait?

For long-term investors, both Home Depot and Lowe's offer compelling opportunities, but their risk-return profiles differ. Home Depot's premium valuation and established Pro ecosystem justify a hold for those prioritizing stability and brand strength. However, its slower dividend growth and higher payout ratio limit upside potential.

Lowe's, on the other hand, presents a stronger buy case. Its lower valuation, faster dividend growth, and strategic Pro investments position it to outperform in a post-rate-cut environment. The company's disciplined capital allocation—evidenced by its recent debt repayments and focus on free cash flow—further enhances its appeal.

Conclusion: Navigating the Housing Market's Next Chapter

As the housing market stabilizes and rate cuts loom, Home Depot and Lowe's are well-positioned to benefit from a rebound in home improvement demand. While UBS's bullish call is grounded in their Pro segment strength and dividend sustainability, investors must weigh valuation metrics and strategic execution. For those seeking a balance of income and growth, Lowe's offers a more attractive entry point. Home Depot, meanwhile, remains a defensive play in a sector poised for long-term resilience.

In a world where macroeconomic uncertainty persists, these two retailers exemplify the power of strategic differentiation and disciplined capital allocation. The question is not whether they will succeed, but which one will deliver superior returns in the years ahead.