Source: PaxForex Premium Analytics Portal, Fundamental Insight
At the end of February, shareholders of Home Depot, the largest home improvement retailer, were rewarded with a 15.2% increase in their quarterly dividend to $1.90 per share. Notwithstanding this generous payout increase, the company's stock is down 23% for the year, opposed to the S&P 500's 5% decline during that time.
So should dividend investors buy Home Depot stock after the sharp drop in its price? Let's break down the fundamentals and stock valuation.
When Home Depot released its Q4 report, which ended Jan. 30, it was able to surpass analysts' consensus forecasts. The company reported net sales of $35.7 billion, up 10.7% from a year earlier. That easily beat analysts' average forecast of $34.9 billion in revenue for the quarter. Home Depot's total comparable sales were up 8.1% year over year.
So how did Home Depot manage to beat analysts' forecasts in the ninth quarter of the last 10? President and COO Ted Decker points to strengths in all areas of the business. In his opening remarks during a recent earnings call, he said that all of the company's sales departments performed positively in the fourth quarter.
This was due in large part to Home Depot's leading market share among professional contractors, which accounted for the majority of large purchases (i.e., over $1,000). An 18% increase in these deals during the quarter compared to last year helped offset a 3.8% decline in total deals.
In addition to the growth in comparable sales, Home Depot also had more stores than a year ago. The number of stores improved 0.9% to 2,317 at the end of Q4.
As for the bottom line, Home Depot posted diluted earnings per share (EPS) of $3.21 in the fourth quarter, up 21.1% from the previous quarter. That beat analysts' average forecast of $3.20 per quarter, the ninth time in the last 10 quarters that the company has managed to achieve such a result.
In addition to the increase in net sales, several other factors contributed to the profit growth. First, the net margin rose 50 basis points YoY to 9.4% in the fourth quarter. Second, Home Depot's weighted average number of shares declined 3.2% year over year to 1.04 billion in the quarter due to the share buyback program.
Thanks to the economic recovery, Home Depot expects only modest positive sales growth and low-single-digit growth in diluted earnings per share in 2022. However, because of the stable housing market, analysts still expect Home Depot to deliver 14.6% annualized earnings growth over the next five years.
Home Depot's excellent fourth quarter and decent medium-term growth outlook only partially explain the massive dividend increase. The other part of the equation is the dividend payout ratio.
In 2021, Home Depot's dividend payout ratio was only 43%. First, it gives the company a reserve to maintain the payout in the event of an economic downturn. It also gives Home Depot the ability to continue to buy back shares and acquisitions to increase diluted earnings per share.
Home Depot's annual earnings growth potential in the low tens and safe payout ratio should provide annual dividend growth of at least double digits for the foreseeable future. And as a cherry on top, the stock currently boasts the best dividend yield on the market at 2.4%.
Home Depot's sell-off this year seems to have caused the stock's valuation to drop from somewhat overvalued to undervalued. By comparison, Home Depot's projected price-to-earnings (P/E) ratio of 19.5 matches the P/E ratio in the S&P 500. One might conclude that a company as grand as Home Depot deserves to trade at a moderate premium to the market.
The stock's trailing 12-month dividend yield of 2.2% is also slightly above the 13-year median of 2%, another sign that the stock is a buy for income-oriented investors.
As long as the price is below 340.00, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 308.18
- Take Profit 1: 300.00
- Take Profit 2: 285.00
Alternative scenario:
If the 340.00 level is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 345.00
- Take Profit 1: 375.00
- Take Profit 2: 395.00
