Source: PaxForex Premium Analytics Portal, Fundamental Insight
Home Depot shares fell slightly in morning trading Tuesday after the company released earnings data for the fourth quarter and fiscal year 2021. The home improvement retailer beat revenue and earnings forecasts, but management's vague sales projections for 2022 seem to have disappointed investors.
The slowdown in sales could lead to questions about Home Depot. As the state of the business may increasingly resemble the state before the pandemic, investors may wonder what to do with this company's stock.
Home Depot's sales for the fourth quarter of 2021 (ended Jan. 30, 2022) were $35.7 billion, up 11% from the year-ago quarter and exceeding analysts' projections of $34.9 billion. Comparable sales were up 8%.
This additional revenue boosted net income 17% in the same period to $3.4 billion, or $3.21 per diluted share. Limiting the increase in operating expenses to 4% more than offset the 28% increase in income tax expense. As a result, earnings exceeded analysts' projections of $3.17 per share.
The fiscal year 2021 sales of $151 billion exceeded analysts' forecast of $150 billion. The company's profits were up 14% from 2020 levels and included an 11% increase in comparable sales. For the period, earnings also rose 30% to $16.4 billion, or $15.53 per diluted share, just above the consensus forecast of $15.47 per share.
In addition, the company raised its dividend by 15%. Shareholders now receive $7.60 per share per year, a dividend yield of 2.2% and well above the S&P 500 average of 1.4%.
Despite the positive earnings and revenue results, investors don't look pleased, as the outlook for fiscal 2022 calls for "slightly positive" sales growth and a "low single-digit" increase in diluted earnings per share. This may not exceed analysts' expectations for sales growth of 2.5% and earnings growth of just under 5%. Thus, the numbers may resemble the pre-pandemic conditions of 2019, when sales were up 2% year-over-year.
Despite the expected slowdown, other performance figures look slightly above average. The stock price is up more than 15% over the past year, even with a drop of just under 25% since the end of last year. That beats the overall return of the S&P 500, which was about 12% over the same period.
The stock's P/E ratio is about 22, which is close to historical averages. However, it is slightly higher than that of arch-rival Lowe's, which trades at 19 times earnings. While one could argue that Home Depot is a more successful company than Lowe's, Home Depot also has a higher valuation.
Nevertheless, the dividend continues to show strength. The 15% payout increase has exceeded the 10% dividend increase in each of the last two years. In addition, given that the company's free cash flow in the fiscal year 2021 was about $14 billion, spending $7 billion on cash dividends over the same period makes the payout affordable. In addition, the 15 percent increase in the dividend far exceeds the inflation rate, which is currently about 7 percent. This is important for income investors given the rise in prices in recent months.
Moreover, investors may not appreciate the long-term performance of the dividend. Although dividends do not rise every year, Home Depot has offered steady quarterly payouts since it began paying dividends in June 1987. With an initial annual payout of $0.0018 per share, adjusted for the split, the payout has grown more than 4,300 times since the company's inception!
Despite the sell-off following the release of the financial results, Home Depot stock is still capable of delivering solid earnings. Indeed, the company's days as a growth stock are long over, and its daily performance probably won't excite investors.
Nevertheless, Home Depot reaffirms its status as a company that will "keep you rich." Thanks to its stock price performance and rising dividends, it may serve conservative investors well.
As long as price is below 345.00, follow the recommendations below
- Time frame: D1
- Recommendation: short position
- Entry point: 307.70
- Take Profit 1: 300.00
- Take Profit 2: 270.00
Alternative scenario:
If the level of 345.00 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 345.00
- Take Profit 1: 375.00
- Take Profit 2: 395.00
