IS HOME DEPOT’S SUCCESS WORTH BUILDING ON?

By Maen Soufi, Equity Analyst 

Home Depot (NYSE: HD) has drawn attention since the start of the pandemic amid the covid-induced surge of home projects, concerns about inflation, as well as the growing housing shortage in America. Inflation has surged in 2022, reaching 7.5%, the highest figure since 1982. Housing and real estate have long been an asset class that investors have used to hedge against inflationary pressures due to their trends of increasing income, appreciating value, and depreciating debt. Realtor.com research also notes there is a shortage of 5.8 million homes in the United States. With Home Depot a major player in home improvement, I wanted to have a closer look at whether or not it is a good buy, especially with regards to its history as a consistent and growing dividend payer.

Dividend History is One of Stability and Growth 

Home Depot has made a name for itself as a reliable dividend payer. Having paid its first dividend in 1987, in the last 10 years the company has paid out an average dividend yield of 2.19% with little fluctuation from this figure. During this period the yield hasn’t exceeded 3%, so investors are not likely to be dazzled by Home Depot’s dividend payout on the surface. However the dividend growth has been sensational.  In 2012, Home Depot paid out just $.29 per share. Today the stock pays out $1.90 per share. So, if you bought and held HD for ten years, you would have seen your quarterly cash flow grow by around 600%! The dividend yield has remained around just 2%, because the share price has grown dramatically along with the dividend. In 2012, shares were trading at around $50. Today they fetch around $320. So both the dividend cash flow and the share price have increased by a factor of 6 in just a decade. Not bad at all! 

What their dividend history also tells us is that Home Depot seems to have found a healthy balance between reinvestment and rewarding share-holders. In even especially successful years, Home Depot has opted to maintain consistent growth of dividends while also issuing buybacks. Last year Home Depot spent nearly $15B in repurchases alongside paying about $7B in dividends. This is what a track record of disciplined capital management looks like. 

What Do We Expect for the Future of Home Depot’s Dividends?

Can Home Depot keep up this powerful growth?

Home Depot management has been putting out suggestions of cautious optimism for this year, describing year over year sales, and comparable sales growth as ‘slightly positive.’ They’ve mirrored this sentiment with dividends for this year as well. In February, Home Depot announced its dividends for 2022 at $7.60, which is a 15% increase from the year prior but comes below the average annual dividend growth of 20% across the last decade.

While I agree with their outlook considering the strength of its growth over the peak of the COVID period is unlikely to continue, supply chain issues persist, and uncertainties regarding continued inflation and the international economic conditions, the market has HD down 14% since its 2021 Q4 results and guidance for 2022 were released. Shareholders may be disappointed by the relatively lower growth of the dividend, the payout ratio comes out to be 42.5%, which is only just below the 10-year average of 44.2%. Home Depot is essentially sending the message that investors can continue to expect stability on the dividend front.

Q4 2021 Earnings Report and Guidance

Interestingly, the recent short slide in Home Depot’s trading price comes despite Home Depot beating its targets for Q4. Its earnings per share came in at $3.21 vs. $3.18 expected, and revenues totaling $35.72 billion compared to the $34.87 billion expected. Q4 Sales are up year over year by 10.7%. Home Depot’s balance sheet also does not display any alarming levels of debt. The cause of the drop is described as a result of the restrained forecast and guidance given by Home Depot for the coming year. Investors are wary, given this forecast, that Home Depot may have been just a pandemic winner.

Home Depot actually has a lofty target for annual revenue, seeking to hit $200B in sales, almost $50B more than last year’s target, although no specific time-table for this objective has been given. The company is looking to appeal to home professionals to reach this goal. It is currently in the middle of a 5-year plan involving a $1.2B investment to build large flatbed distribution centers. The idea behind these facilities is that they will allow Home Depot to store and carry out large orders. Developing these capabilities will allow Home Depot to better meet the needs of the professional customer base, especially those involved with large multi-family projects, who often overlooked conventional Home Depot stores because they were not able to carry high volumes of a variety of products. This fits in with the general idea that America simply doesn’t have enough housing, and eventually, someone is going to have to do something about it. 

Conclusion

All things considered; Home Depot is a good pick for investors looking to benefit from regular dividend returns, but after 12 years, I’m not sure that Home Depot has the same potential it once had as a growth stock. The dividends will be modest, but they will continue to grow and continue to exist. While I see that Home Depot has some upside potential, I would not go so far as to say that it is undervalued. I would like to see further growth in its earnings per share in the coming quarters before encouraging investors to buy. It is important to consider also that Home Depot is under new leadership, and with that comes potential, but also uncertainty. And because the past several years have been so strong, it is understandable that investors may be concerned about the ability to sustain this success. That said, the ongoing growth campaigns, and strategic goals, I believe are effective, and keep Home Depot moving in the right direction.