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S&P downgrades Lowe's on 'less conservative' financial policy

S&P Global Ratings on Dec. 12 downgraded the issuer credit rating of Lowe's Cos. Inc. to BBB+ from A-, with a stable outlook, after the company disclosed a "less conservative" financial policy to increase shareholder returns.

The agency affirmed Lowe's A-2 short-term rating.

Lowe's CFO David Denton told analysts and investors Dec. 12 that the home improvement chain will now prioritize operational investments to drive growth and returns within its core retail business. It will aim for an adjusted debt-to-EBITDA ratio of 2.75x compared to its previous target of 2.25x.

"We believe that increasing our leverage ratio will allow us to optimize our capital structure and our cost of capital and drive incremental returns for our shareholders," Denton said. "Our debt maturities are well-laddered with no 1 year requiring a significant outlay of funds, which provides us incredible flexibility as we issue additional bonds and increase our leverage."

Denton added that acquisitions will not be a priority in the near term.

"We are committed to making disciplined risk-adjusted decisions when deploying our cash. We will invest in projects that help us grow and stabilize our business with healthy long-term returns. We will either fund these types of projects or we will return the capital to our shareholders if that creates the best value," he said.

The company then announced a $10 billion share buyback program with no expiration date.

S&P believes that after issuing debt to fund share repurchases, Lowe's will maintain leverage in the high-2x area.

However, the rating agency expects positive sales trends to continue, in addition to good cash flow generation over the next two years for Lowe's. S&P forecasts favorable trends in the repair and modeling sector, as well as good business execution including store and supply chain investments at the retail chain.

S&P added that it believes Lowe's shift in financial policy will not limit its ability to finance and execute new operational strategies.

The agency noted that it could lower Lowe's rating if it expects leverage to be sustained at 3x or higher if the company adopts a more aggressive financial policy and capital allocation plans.

Lowe's has a network of 2,133 home improvement and hardware stores in the U.S., Canada and Mexico.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings, a separately managed division of S&P Global. Descriptions in this news article were not prepared by S&P Global Ratings. The original S&P Global Ratings documents referred to in this news brief can be found here.