Home improvement has been a great business model for some time.  Regardless of what the economy is doing, Americans love upgrading their homes.  Housing market strong?  “Well maybe it’s time to get a few projects done and look into moving.”  Weak housing market?  “We’ll we can repaint the bedroom or redo that bathroom since we’ll be staying here longer.”

Home ownership is a never ending hamster wheel of home fixes and improvements.  Buyers expect homes to be turn-key or “move in ready”.  Home improvement is an easy to understand business.  They sell the things that facilitate people upgrading their homes.  Home Depot is the leader of this pack.

Strong Operational Results

After another strong quarter and full year, it’s time to add to this holding.  Home Depot has been the better operator in the home improvement space versus competitor Lowe’s.  For about the past decade Home Depot almost always puts up better comp sales than Lowe’s.  Comparable sales or “comp” sales are a measure of same store revenue growth.  This quarter Home Depot reported 7.5% comps versus the 4.1% reported by Lowe’s.

So why else is it time to add?

For 2018 Home Depot is expecting sales growth of 6.5% with comps of 5%.  On top of that they are guiding for earnings of $9.31.  Ok so let’s run with these figures.

Fast Graphs

Here’s the chart from Fast Graphs, an investing website I highly recommend.  The black line is the stock price, the blue line is the average multiple (PE ratio) that the company has garnered over time.  Generally speaking when the black line is above the blue line it can signal a stock is expensive.  It can be a little more nuanced than that, it’s not a perfect science (we are dealing with human emotions) and changing business conditions may grant an increased or decreased multiple.  The company also sports an A (this is good) credit rating from S&P.

The stock has fallen about $10 a share since earnings were released.  Using some basic math, $180 share price / $9.30 in earnings gives us a multiple of about 19 for the full year expectations.  Not too bad for the best of breed operator, especially in this interest rate environment.

Simply Safe Dividends

Brian at Simply Safe Dividends runs a great site and has a great feature to view relative company performance at a glance.  A safety and growth score in the 90s means Home Depot ranks better than over 90% of companies in the dividend company universe.  Naturally a consequence of that success is having a middle of the pack dividend yield.

Management targets a 55% dividend payout ratio so we can see that they are still under that target slightly.  This may lead to a few more years of outsized dividend increases.

The company has also been buying back shares hand over fist.  The number of shares outstanding has nearly fallen 50% since 2005.  This has helped juice earnings per share growth over the time period and is only of the reasons this company has been a stock market darling.

Fat Dividend Increase

Let’s finish with the hefty 16% dividend increase coming.  This snapshot is from a text I received through my service Custom Stock Alerts utilizing my “ex-dividend” tool.  I receive a text alert 5 days prior to the ex-dividend date (the date you must own shares by).  With a date of March 7th, you must own shares by the market close on Tuesday March 6th to receive the increased dividend.

What I’m able to do is both add to my share count, receive the increased dividend for all my shares which in turn provides more compounding.  Shares today sport a forward yield better than the S&P at 2.3% (versus 1.82%)

Conclusion

Home Depot is the best of breed operator in the home improvement space.  Management has shown a willingness to return capital to shareholders through a combination of dividends and buybacks.  Even after strong earnings for the quarter and full year, shares have pulled back about 6% in recent weeks.  With an impending 16% dividend increase, shares trade for under 20x full year expected earnings.  I’m buying here.

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