Home Depot (HD 0.94%) shareholders are in for a treat. The home improvement retailer just announced its dividend increase for the 2024 fiscal year, and it was a significant hike. The higher payout will hit investors' portfolios in late March, assuming they own Home Depot shares as of March 7.
A bigger dividend is a good reason to consider buying this stock, but it's not the main factor that will influence your long-term returns. Let's take a closer look at whether Home Depot is still a good buy for patient investors today.
The new dividend
In late February, Home Depot announced that its dividend will be rising to $9 per share on an annual basis, or $2.25 per share each quarter. That works out to a 2.5% yield based on current prices. It's an 8% increase compared to last year, which might disappoint investors a bit considering that the chain raised its dividend by 10% in 2023.
Still, the dividend was well covered by the $16.69 per share of earnings that Home Depot generated this past year. It's important to note that profits declined 10% year over year, a rare event for this retailer. However, cash flow was much stronger compared to last year, so Home Depot's management team had plenty of flexibility when considering the size of this year's increase.
Warning signs
Home Depot's 2023 year was uninspiring on the growth front, so investors should keep their short-term expectations in check. Sales fell 4% for the Q4 period and for the wider 2023 year, in fact. There was much less demand among do-it-yourself shoppers, who scaled back on home improvement projects. The professional contractor niche didn't shrink as quickly, though, which allowed Home Depot to outperform peers like Lowe's through most of the year.
The main metric to watch here for signs of rebound is customer traffic. Home Depot handled fewer guests last year for a second consecutive fiscal year, which makes it much harder to post a growth rebound. Happily, the declines slowed to 3% in 2023 from 6% in 2022. Yet the chain will need this metric to move back into positive territory soon to avoid a third straight year of sluggish growth.
Looking ahead
Home Depot's dividend payment is just part of the ample cash returns that shareholders can expect when owning this stock. The company paid out $16 billion of direct returns to investors in the past year, almost evenly split between dividends and stock buybacks. There's good reason to expect this figure to rise in 2024 given that Home Depot is projecting a return to per-share earnings growth this year.
The stock isn't cheap right now. You'll have to pay nearly 2.5 times annual sales for Home Depot compared to 1.5 times sales for Lowe's. That valuation is also close to the highest price investors have seen for this business since the pandemic record.
The chain could earn that premium by returning to a faster growth profile in 2024. Its industry-leading profit margin will help, too, as Home Depot is projecting another year of over 14% operating profitability.
Still, investors might want to watch this dividend stock for now. Its elevated valuation means there's a real risk of paying too high of a price for this industry leader, despite its generous capital return plans.
