3 Points to Check Before Buying The Home Depot, Inc. (NYSE:HD) For Its Dividend

Stjepan Kalinic
·4 min read

This article first appeared on Simply Wall St News.

In the face of inflation concerns, it is not surprising that real estate gets so much attention. Being the dominant presence in the home improvement sector, The Home Depot, Inc. ( NYSE: HD ) is certainly benefiting from those trends.

With the latest earnings reported and the ex-dividend date announced, we will examine its dividend trends over the last decade.

The Home Depot is a Georgia-based retailer focusing on home improvement and maintenance. It operates 2,298 stores across North America, focusing on the 2 key market segments: professionals and Do-it-yourself (DIY) customers.

The company reported a solid second-quarter result with improved earnings and revenues, although profit margins were flat.

Second quarter 2021 results:

  • Revenue: US$41.1b (up 8.1% y/y).

  • Net income: US$4.81b (up 11% y/y).

  • Profit margin: 12% (in line).

  • GAAP EPS: US$4.53 (beat by US$0.11)

Over the last 3 years on average, earnings per share have increased by 15% per year, whereas the company’s share price has increased by 18% per year.

However, comparable sales missed , delivering +4.5% vs. Consensus +5.61%, and gross margin fell 80bps to 33.2%.

The stock slumped on the results, with analysts quoting comparable sales miss and concerns for profit margins. Yet, Wells Fargo keeps a buy rating , quoting commodity prices and Delta variant risks to see heightened demand for home improvement.

Not to mention the incoming hurricane season.

Dividend Outlook

A 2.0% yield is not terribly exciting, but the long payment history suggests Home Depot has some staying power.

The company also returned around 1.9% of its market capitalization to shareholders in stock buybacks over the past year.

Explore this interactive chart for our latest analysis on Home Depot!

historic-dividend
historic-dividend

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut.Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable.

Home Depot paid out 44% of its profit as dividends over the trailing twelve-month period.A medium payout ratio strikes a good balance between paying dividends and keeping enough back to invest in the business.Besides, if reinvestment opportunities dry up, the company has room to increase the dividend.

Another important check is to see if the free cash flow generated is sufficient to pay the dividend.The company paid out 59% of its free cash flow, which is not bad per se but does start to limit the amount of cash Home Depot has available to meet other needs.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

You can check our latest analysis on Home Depot's financial position here.

Volatility and Growth Potential

The dividend has been stable over the past 10 years, which is great. We think this could suggest some resilience to the business and its dividends.During the past 10-year period, the first annual payment was US$0.9 in 2011, compared to US$6.6 last year.Dividends per share have grown at approximately 21% per year over this time.

Dividends have been growing pretty quickly, and even more impressively, they haven't experienced any notable falls during this period.

While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) grew, as this is essential to maintaining the dividend's purchasing power over the long term. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see Home Depot has grown its earnings per share at 19% per annum over the past five years.

A company paying out less than a quarter of its earnings as dividends, and growing earnings at more than 10% per annum, looks to be right on the cusp of its growth phase. At the right price, it is an interesting opportunity.

Conclusion

The Holy Trinity of a good dividend opportunity is affordability, stability, and growth prospects.

Home Depot's dividend payout ratios are within normal bounds, although we note its cash flow is not as strong as the income statement would suggest.

That said, we were glad to see it growing earnings and paying a fairly consistent dividend.Overall we think Home Depot scores well on our analysis. It's not quite perfect, but we'd definitely be keen to take a closer look.

Investors generally tend to favor companies with a consistent, stable dividend policy instead of those operating an irregular one.Still, investors need to consider a host of other factors, apart from dividend payments, when analyzing a company. For example, we've picked out 1 warning sign for Home Depot that investors should know about before committing capital to this stock.

We have also put together a list of global stocks with a market capitalization above $1bn and yielding more 3%.

Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com

Our goal is to create a safe and engaging place for users to connect over interests and passions. In order to improve our community experience, we are temporarily suspending article commenting

Recommended Stories

  • Predicting all of Auburn’s starters

    What do you think about these as Auburn's starters?

  • Got $5,000? 3 Beaten-Down Cathie Wood Stocks That Could Soar

    Cathie Wood was the darling of Wall Street last year as her ARK funds smashed the returns of the overall market. Let's find out why they think you should take a hard look at Twilio (NYSE: TWLO), Roku (NASDAQ: ROKU), and Zoom Video Communications (NASDAQ: ZM). Will Healy (Twilio): Twilio has become one of the more significant holdings in Cathie Wood's ARK Innovation ETF and two other ARK Invest funds.

  • 3 Investing Moves That Could Make You a Multimillionaire

    Whether you're new to the stock market or have been investing for years, nearly everyone wants to get rich someday. While becoming a multimillionaire is a lofty goal, it is possible -- even if you're not already wealthy. Investing in the stock market is one of the easiest and most effective ways to generate wealth over time.

  • 10 Best Dividend Stocks Hedge Funds are Buying

    In this article, we will be taking a look at the 10 best dividend stocks hedge funds are buying. To skip our detailed analysis of dividend investing, you can go directly to see the 5 Best Dividend Stocks Hedge Funds are Buying. Dividend investing is something that must be done with care and great deliberation. […]

  • Michael Burry’s Pretty Big Short Hinges on Treasuries Sinking

    (Bloomberg) -- Call it the Pretty Big Short. Michael Burry, whose huge, wildly profitable bets against the housing bubble were made famous in “The Big Short,” is wagering that long-term U.S. Treasuries will fall.His Scion Asset Management held $280 million of puts on the iShares 20+ Year Treasury Bond ETF at the end of June, according to a regulatory filing released this week, an increase from $172 million three months earlier.The options contracts would make money if TLT, as the exchange-traded

  • Is a Stock Market Crash Coming? Here's What the Data Suggests

    For the past 17 months, investors have enjoyed a historic rally. Since bottoming out on March 23, 2020, the broad-based S&P 500 (SNPINDEX: ^GSPC) has doubled in value. Although no one knows with any certainty, we can turn to an abundance of data to get a better idea of what might lie ahead for the S&P 500 and your portfolio.

  • 3 Boring Healthcare Stocks Everyone Should Own

    These pharmaceutical giants offer strong, dependable dividends and the size to weather the market's ups and downs.

  • 10 Best Dividend Stocks with Over 5% Yield According to Hedge Funds

    In this article, we will be taking a look at the 10 best dividend stocks with over 5% yield according to hedge funds. To skip our detailed analysis of dividend investing, you can go directly to see the 5 Best Dividend Stocks with Over 5% Yield According to Hedge Funds. As the COVID-19 pandemic continues […]

  • 3 Warren Buffett Dividend Stocks Begging to Be Bought

    Warren Buffett became Berkshire Hathaway's CEO all the way back in 1965, a time when the company was valued at roughly $19 per share. Today, Berkshire's class A shares trade at roughly $429,700 per share, and the company's returns across Buffett's tenure are even more impressive if you take dividend payments into account. With that in mind, three Motley Fool contributors have identified three dividend-paying stocks in the Berkshire Hathaway portfolio: Verizon Communications (NYSE: VZ); Mastercard (NYSE: MA); and Apple (NASDAQ: AAPL).

  • 3 Dirt-Cheap Cannabis Stocks That Just Might Triple by 2023

    Marijuana is seen as one of the biggest growth markets around, even if many of its leading stocks have fallen far short of expectations. Once the cannabis industry finally does take off we may see all boats lifted by the rising tide, but Planet 13 Holdings (OTC: PLNH.F), Trulieve Cannabis (OTC: TCNNF), and the AdvisorShares Pure US Cannabis ETF (NYSEMKT: MSOS) may have already tripled in value by then. Alex Carchidi (Planet 13 Holdings): If you've ever visited the Las Vegas Strip, you've probably seen or even experienced Planet 13's flagship cannabis superstore, where more than a million tourists flocked to buy marijuana in 2019.

  • Why Bitcoin, Ethereum, and Dogecoin Are All Soaring Today

    Bitcoin (CRYPTO: BTC), Ethereum (CRYPTO: ETH), and Dogecoin (CRYPTO: DOGE) are up 6.82%, 8.16%, and 8.36% in the past 24 hours. Earlier in the day, Coinbase Global (NASDAQ: COIN), the second-largest cryptocurrency exchange in the world, announced it would be adding $500 million worth of cryptocurrency to its balance sheet. Coinbase stock is also up 3.10% to $255.98 per share in the same period.

  • 10 Stocks that Helped Warren Buffett Make $4.6 Billion in Dividends

    In this article, we will be taking a look at 10 dividend stocks that helped Warren Buffett make $4.6 billion in dividends. To skip our detailed analysis of Buffet’s investment strategy and profile, you can go directly to see the 5 Dividend Stocks that Helped Warren Buffet Make $4.6 Billion in Dividends. Warren Buffett is […]

  • Palantir Is an Enigma. The Opportunity in Its Stock Is Far More Clear.

    Palantir stock is a favorite of retail investors, but the company’s outside-the-box thinking makes some on Wall Street nervous.

  • A ‘Flash Recession’ Might Be Looming. Here’s What That Means.

    Recently, data on economic growth have been missing estimates as the Delta variant of the virus that causes Covid-19 hampers global supply chains and demand. Bank of America strategists warned in a note published Friday morning that the near future is bleak for the economy, saying a flash recession could come this year. The bank flagged three reasons investors appear to be concerned about economic growth.

  • S&P 500 hasn’t fallen 5% from a peak in nearly 200 sessions—what that tells market historians

    Friday marks the 200th session that the S&P 500 index hasn't produced a drawdown of at least 5% from its recent peak, making the current stretch of equity levitation the longest since 2016, when the market went 404 sessions without falling by at least 5% peak to trough.

  • 3 Retail Stocks With Juicy Dividends You Can Buy Right Now

    Investors win big with stocks that offer potential for capital appreciation and tempting shareholder payouts.

  • This record-breaking figure is now the average 401(k) balance

    If you want to see the benefits of saving early for your retirement and saving with regularity, look no further than the latest report from 401(k) giant Fidelity Investments. The average 401(k) account now has a record balance of $129,300, the company says. Fidelity calculates that even millennials who’ve held their 401(k)s for at least 15 years now have an average balance of just under $280,000.

  • Buffett’s Berkshire Still Isn’t Buying. Here’s What It Sold.

    Warren Buffett’s company trimmed its holdings in three pharma stocks, GM, and Chevron—but bought its own shares.

  • Three Things That Tell Me Lordstown Motors Is in Deep Trouble

    With the founder gone, those left behind are scrambling to turn what's left into a real business.

  • 5 Top Stocks That Can Turn $200,000 Into $1 Million (or More) by 2035

    Time and again, Wall Street has demonstrated that it handsomely rewards patient investors. In other words, buying great companies and allowing your investment thesis to play out over time continues to be a successful wealth-building strategy. The first top stock that could make patient investors a lot richer by 2035 is Singapore-based Sea Limited (NYSE: SE).