The Home Depot (HD) raises dividend by 29%, but doubling of stock price makes the firm less attractive.

Home Depot’s (NYSE:HD) dividend was increased by 29%.  Its overall yield is 2.41% considering the increase. The firm started paying a dividend in 1981.

The Home Depot is one of the largest home improvement retailers in the world. It offers consumers home improvement products, gardening tools and plants, lighting, general tools, home appliances, flooring, cabinets, power equipment, and grills. It also offers installation for most of its products using third-party installers. Its customer base is wide including homeowners, contractors, installers, and repairman. It has over 2000 stores, primarily based in the U.S.  Other operations are in Mexico and Canada. The home improvement firm is located in Atlanta, Georgia and was founded in 1978.

Home Depot has maintained a three-year growth rate of dividends of 24 percent. Home Depot currently ranks 1st in dividend yield within the large cap services, home improvement stores category. The quarterly dividend for the March payment will be $0.89 versus the prior year rate of $0.69 per share. Home Depot is not a member  of our Top 100 Dividend Stocks.  (see below).

The dividend will be paid at the new higher rate on March 23, 2017, to shareholders of record at close of business on March 9, 2017. The Home Depot Store Inc. is currently priced at $148.73. Listed in the table below are the quarterly dividend payments since 2010.

Date Quarterly Dividend
3/9/2017 0.89
11/29/2016 0.69
8/30/2016 0.69
5/31/2016 0.69
3/8/2016 0.69
12/1/2015 0.59
9/1/2015 0.59
6/2/2015 0.59
3/10/2015 0.59
12/2/2014 0.47
9/2/2014 0.47
6/3/2014 0.47
3/11/2014 0.47
12/3/2013 0.39
9/3/2013 0.39
6/4/2013 0.39
3/12/2013 0.39
11/27/2012 0.29
8/28/2012 0.29
5/29/2012 0.29
3/6/2012 0.29
11/29/2011 0.29
8/30/2011 0.25
6/14/2011 0.25
3/8/2011 0.25
11/30/2010 0.236
8/31/2010 0.236
6/1/2010 0.236
3/9/2010 0.236

Analysis of Home Depot is based upon our five key criteria for the Top 100 list, which include;

Category Value Score
Dividend Yield 2.41% 228
Dividend Growth (3-7 year avg) 22% 74
Forward P/E 19.7 168
S&P Financial Rating A 120
Beta 0.95 125
Total Score 715
% Yield 3 Year Div. Growth Rate 7 Year Div. Growth Rate SPS 2016 P/S Ratio 10 yr P/S Low 10 yr P/S High 5 yr low Yield % 5 yr max Yield %
2.41% 24% 21% 85.40 1.73 0.55 2.15 1.58% 2.41%

Positives;

  • Home Depot has paid out a dividend consecutively for the past 36 years.
  • Home Depot maintains an investment grade rating of A.
  • Home Depot has maintained a three-year growth rate of dividends of 24 percent.
  • Home Depot maintains a beta of 0.95, lower than the average company.
  • Home Depot’s new dividend yield (2.41%) is towards the top of its five-year average historical dividend yield.
  • Home Depot’s dividend yield is above that of the S&P 500 Index.

Negatives;

  • Home Depot is trading well above its ten-year average price/sales (P/S) ratio.
  • Home Depot’s stock price has doubled since 2014.

Latest Earnings & Overall Analysis:

Home Depot issued its earnings data on February 21st. The company reported $1.44 EPS for the Q4 quarter, topping the consensus estimate of $1.33 by $0.11.  The firm continues on its pace of outperforming other major retailing firms. The retailer hiked its dividend 29 percent to 89 cents per share while announcing a new a $15 billion stock repurchase program.  Total revenue came in at $22.21 billion versus the  $21.8 billion expected by analysts. Comparable sales were also up nearly 6 percent for Q4 versus expectations by analyst of a 3.7 percent increase.   However, this was lower than the 7 percent increase from Q4 2015. The large retailer continues to benefit from customers improving their homes and from continued labor market growth.  chain has benefited from a stronger economy and rising home values, which have encouraged shoppers to invest in their homes.

For 2017, the firm announced that revenue and comparable sales should rise about 4.5 percent, just below last year’s levels. This is most likely due to modest traffic growth projections. Home Depot’s traffic growth moderated in 2016, dropping to 3 percent from 4 percent in 2015.  E-commerce sales continue to rise at a brisk pace. Internet sales climbed by nearly 20 percent in Q4. This was 3 percent better than last quarter’s results.  E-commerce sales now represent 6% of overall sales, but will continue to become a larger portion of the business.  Gross profit margins were flat at about 34% of revenue while strong buybacks continued to accelerate the bottom line.

 

2016 2015 2014 2013 2012
Earnings per Share 6.33 5.34 4.56 3.76 3.1
Annual Dividend 2.76 2.36 1.88 1.56 1.16
Payout Ratio 43.60% 44.19% 41.23% 41.49% 37.42%

The most impressive item in regard to Home Depot is its consistency of earnings growth and it scale. Its large size offers strong bargaining power versus vendors and lower input prices. Its customer loyalty and brand awareness are among the top of all retailing firms. The firm has not suffered much from consumers moving online or as other consumer discretionary firms like general retailers.  Whereas firms like Macy’s and the Gap have suffered, it unique business model has stood up to online competition.  This is especially true given many people that shop at Home Depot depend upon the staff to answer questions regarding what products to ultimately purchase.

The home improvement giant has produced one of the best returns for investors since the Great Recession. The firm is a cash machine. It has returned almost $50 billion to its shareholders in way of stock repurchases and the payment of dividends. through dividends and share buybacks over the past five years (25% of its market cap). It is solely now focused on North America retail, after exiting China.  After selling off its professional business several years ago, it is now moving back towards selling to professionals.

Earnings per Share 2017 (projected) 7.25
Dividend 3.56
Payout Ratio 49.79%

The firm set a $15 billion share repurchase plan in place in addition to the large dividend increase.  Its payout ratio is still below 50%, although it has been climbing for several years. Its payout ratio in 2012 was 37%.  However, the payout ratio is still low enough for the allowance of future enhancement of the payout.  The company earns a high credit rating from S&P of A.  Its stock’s beta is below 1, a remarkable statistic given its industry.   Trading at $143, it trades at 19.7 times expected earnings for 2017. Although this is above the market, the company has earned its premium through stellar growth. Its dividend growth rate over the last seven years is 21% per year. This is well above most other retailing companies. However, despite all the positives, the firm’s stock has risen much faster than the market. In the past three years, the stock price has doubled. We would prefer a stock pullback of 10-15% to pull its price/sales ratio back towards a more moderate level.

Based on the firm’s elevated P/S ratio and doubling of share price, The Home Depot Inc. does not qualify as one of our Top 100 Dividend StocksPlease subscribe to our monthly premium newsletter to find out more about which stocks are listed in our model portfolio.  

The Home Depot, Inc. Dividend Yield Historical Chart (Click to enlarge)

hd3

Chart Explanation:  Dividend growth stocks may be viewed undervalued when the current yield is above historical readings for the past 5 years. 

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