Source: PaxForex Premium Analytics Portal, Fundamental Insight
A dividend growth investing strategy can be profitable: buy and hold high-quality stocks that increase profits each year and share them with your investors. Home improvement retailer Home Depot certainly earns its dividends-the company has raised its dividend every year for 13 consecutive years.
The housing market may be on shaky ground as mortgage rates continue to rise, but that shouldn't scare you away from Home Depot, which is poised to thrive no matter what the housing market does. Here's why Home Depot will likely continue to raise its payout and why it deserves a place in any diversified dividend portfolio.
Home Depot is the leading home improvement retailer in the U.S.; it sells to both professional contractors and consumers, making it a discreet way to invest in the broader housing market.
The company sells tools and materials for building and renovating homes, and over the past few years, the company has been doing great. Revenue growth has gone up and down, especially with COVID-19. But over the past five years, it has increased by an average of 10% per year.
This business has also been resilient; revenue growth has only fallen to negative 5%, even though the lockdown almost brought the economy to a halt in 2020. Today, the real estate market is cooling off as mortgage rates reduce buyer demand, but management still forecasts sales growth of 3% in 2022.
Go back to the great financial crisis of 2008 and 2009, which led to what many consider to be the worst bear market in housing history. You will see that revenue growth has been reduced to negative 20%, but still not enough for Home Depot not to generate positive free cash flow. In other words, the company was still generating cash profits. During those difficult years, company management froze dividends, but shareholders still received payouts.
Encouragingly, the company has shown that it can perform in good and bad times. This is a fundamental trait for dividend stocks, as you will see ups and downs in the markets over a long holding period. Home Depot certainly qualifies for this.
Having a steadily growing and reliably profitable business is one thing, but how management uses those profits is another important conversation. Dividend stocks must consistently pay and raise their dividends, but do so responsibly; borrowing to pay dividends or having too high a payout ratio is a recipe for disaster.
As the reports show, Home Depot's cash profits easily cover payouts. The dividend payout ratio is 68%. It has been declining in recent years, but the company still has plenty of breathing room in case the business falters. Investors are enjoying solid dividend growth; over the past five years, the company has increased its dividend by an average of 17% per year. Perhaps that growth will slow to keep the payout ratio at an acceptable level, but high single-digit dividend growth seems achievable if Home Depot's earnings continue to grow.
In the event of a darker scenario in which Home Depot's earnings fall, the company has options to keep its dividend afloat. The company has a strong balance sheet, with a debt ratio of only 1.4 times EBITDA. Many will agree that any ratio below 2.5 is excellent, so the company's solid financial performance should give investors additional peace of mind.
Home Depot is a favorite stock that doesn't usually suffer large drawdowns. The stock's 34% drop from highs is the second-largest in 10 years, not counting the COVID-19 collapse in 2020. The stock's current price-to-earnings (P/E) ratio is 16.7, which is already a solid discount compared to the median P/E of 22 over the past decade.
It is unlikely that this company will go anywhere, and the market is offering investors a good deal on a blue-chip stock that is willing to continue to pay and raise its dividend. Home Depot, probably a future dividend aristocrat, should be on any dividend investor's shopping list, especially if the stock price continues to fall in the coming months.
As long as the price is below 290.00, follow the recommendations below:
If the level of 290.00 is broken-out, follow the recommendations below:
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