Please ensure Javascript is enabled for purposes of website accessibility

Will Home Depot Announce a Big Dividend Boost This Week?

By Demitri Kalogeropoulos - Feb 18, 2018 at 11:32AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The stars could be aligning for a significant dividend increase as part of the retailer's upcoming earnings report.

Home Depot (HD 0.15%) has made a habit of updating its capital return plans during its fourth-quarter earnings reports, which means investors are likely to see a new dividend when the retailer announces results on Tuesday. Home Depot's quarterly dividend is currently $0.89 per share, which yields just under 2% at the current share price.

Let's take a look at why a payout hike looks likely.

A customer holding up a power drill at the hardware store.

Image source: Getty Images.

Wrapping up a good year

Home Depot is likely to announce unusually strong results on Tuesday, in terms of its operations and its finances. Management's latest forecast calls for 6.5% comparable-store sales growth to mark a solid acceleration over the 5.6% it achieved in each of the past two fiscal years.

Some of that speedup was derived from a temporary lift provided by recovery efforts tied to natural disasters that struck the U.S. and Mexico last year. However, Home Depot is outgrowing rival Lowe's (LOW -0.81%), too, where comps are on pace to rise by just 3.5% for the full year.

And Home Depot is converting more of its revenue into profits. Operating income rose to $11.5 billion through the first nine months of the year, or 14.9% of sales, compared to $10.5 billion, or 14.5% of sales, a year ago. Lowe's profitability trails this result by a wide margin.

HD Operating Margin (TTM) Chart

HD Operating Margin (TTM) data by YCharts

Plenty of cash to go around

A few other factors suggest the home improvement giant could reveal a significant dividend boost. For one, CEO Craig Menear and his executive team recently announced a major increase to their planned share repurchase spending. Rather than the $5 billion they had originally targeted, executives said in November that they would be returning $8 billion to shareholders through that channel in 2017, including $2.1 billion of buybacks in the fourth quarter. That shows management is bullish on the company's long-term growth outlook, and implies that it isn't struggling to generate cash over and above what it takes to run the business.

In addition, Home Depot should receive some large ongoing benefits from the recent corporate tax cuts, which could factor into management's thinking as regards the next dividend.

How big of a raise?

Home Depot says it aims to return 55% of its earnings to shareholders through dividends, making it more generous than many retailers, including Lowe's, with its 35% payout target. But the company has fallen a bit short of that goal since it was established a year ago. The dividend amounted to 42% of net income in 2016, and rose to just 46% through the first nine months of fiscal 2017.

As a result, management should have room to increase the payout by significantly more than the 11% profit increase Home Depot is expected to achieve for the year. (EPS should rise by 14% thanks to those stock buybacks.) Sure, income investors aren't likely to see a raise that rivals last year's 29% hike. But it wouldn't be reckless of the management team to boost the annual dividend by 15% or 20%, given the rock-solid results and impressive growth Home Depot has delivered over the past 12 months.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
HD
$274.27 (0.15%) $0.40
Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
LOW
$174.67 (-0.81%) $-1.43

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
317%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/01/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.