Thursday, June 13, 2019

Home Depot (HD) Dividend Stock Analysis

The Home Depot, Inc. (HD) operates as a home improvement retailer. It operates The Home Depot stores that sell various building materials, home improvement products, lawn and garden products, and d├ęcor products, as well as provide installation, home maintenance, and professional service programs to do-it-yourself and professional customers. It's largest competitor is Lowe's (LOW), which we analyzed last week.

Home Depot increased its quarterly dividend by 32% to $1.36/share in February, marking the tenth consecutive year of dividend increases for this newly minted dividend achiever. During the past decade, the company has managed to boost distributions at an annualized rate of 16.40%/year. Home Depot started paying dividends in 1987 and kept raising the bar until it kept them unchanged in 2008. After that, Home Depot started growing shareholder distributions again in 2010. I expect dividend growth to slow down during the next recession, and we may even have a couple of years of dividend freezes ( keeping dividends unchanged). But over the long run, the company should be able to grow dividends decade over decade.

During the past decade, the company was able to grow earnings per share at an annualized rate of 22%/year. Earnings grew from $1.33/share in 2009 to $9.73/share in 2019. Analysts expect Home Depot to earn $10.09/share in 2020. This is impressive growth in earnings per share, which was definitely aided by the recovery in the housing market post the financial crisis of 2007 – 2009. It is also helped by the fact that 2009 and 2010 marked the lows for earnings per share post the crisis. It bears mentioning that earnings for companies like Home Depot and Lowe’s are exposed to the cyclical nature of the economy. This means that earnings per share will increase during economic expansions and will decrease during recessions. For example, between 2007 and 2009 earnings per share declined from $2.80 to $1.33.

The long-term success of Home Depot is tied to the housing market in North America. Rising home values over time, coupled with aging of homes, new construction, higher incomes are key factors that could trigger more renovations, home remodels and upgrades. Home Depot targets do-it-yourself customers, professional segment (e.g. – homebuilders) as well as contractors or handymen who help those individuals who are not the DYI type.

The company does not have a lot of room for many more store openings in the US. This means that future growth will be generated from improvements in stores, productivity of operations, and expanding product offerings by tapping more on the online channel. Selling online for direct home delivery or pick up in store, while having the store network and distribution centers behind it, is a competitive advantage that online retailers largely do not have at present. A focus on improved customer care should also increase company’s moat further, because customers will be more likely to return to a store where associates are knowledgeable enough to provide value for their needs. Another opportunity for growth include the rise of smart home systems, which may benefit long-term growth.

Home Depot does have a massive scale, being one of the largest home improvements retailers in the US. This means lower per unit costs, and higher margins. Its retail locations are in good spots, which bodes well for traffic. While the number of store locations in the US is not expected to grow materially in the future, international expansion presents an opportunity.

Earnings per share have been aided by share buybacks. Between 2009 and 2019, the number of shares has been reduced from 1.686 billion to 1.143 billion.

The dividend payout ratio has been in a decline between 2009 and 2019. During the financial crisis in 2009, the payout ratio exceeded 68% due to declining earnings, which is probably one of the reasons why the dividend was kept unchanged. Right now the payout ratio is at 42%, which makes the dividend adequately covered.

Currently, the stock is close to fully valued at 19.50 times forward earnings. Home Depot does offer an attractive dividend yield at 2.75%. Home Depot has a higher forward P/E versus competitor Lowe’s, but it has a higher dividend yield. Lowe’s is selling at 17.40 times forward earnings, but yields 2.30%.

Relevant Articles:

Lowe's (LOW) Dividend Stock Analysis
Busy Week For Dividend Increases
How to select winning retail stocks
Dividend Kings List For 2019

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