In this segment from the MarketFoolery podcast, host Chris Hill and Motley Fool Asset Management's Bill Barker consider the story for leading home-improvement retailer Home Depot (NYSE:HD). And while recent chapters of that tale -- including the last one, as reflected in this week's earnings report -- have been quite upbeat, it's not what Wall Street views as a "growth story." There's a good reason for that, though, and shareholders shouldn't be unhappy with it.
A full transcript follows the video.
This video was recorded on Feb. 20, 2018.
Chris Hill: Let's move on to the home improvement industry and Home Depot's fourth quarter profits. Not surprisingly, came in higher than expected. Overall sales looking good. Same-store sales continue to impress, up 7.5%.
Bill Barker: That's a good number. That's an awfully good number. And the stock is not moving a whole lot in response to that today because it's basically what was expected. They also guided for the year comps of 5% for 2018, and that's awfully good but not really different from what the market was expecting, maybe even a little under what the market analysts had expected. I think they bought back $2 billion and shares over the course of the quarter. They've bumped up their dividend. Home Depot, the equation here is, and has been for a long time, running these stores better and better and better, but not building more stores every year. They're not a store growth story, they're a capital allocation story, where they are reinvesting in themselves by improving the quality and efficiency of their stores, they're attracting more people, they're selling more stuff. But then, they are returning large percentages of that back to shareholders, which relieves them of the obligation of figuring out what else to do with it, be that buying another company or, where is a new location to put up more stores, what international countries should we expand into. No, just, return a lot of the money back, raise our dividend every year, buy back some shares, and keep doing what we're doing, take market share by being better with the store count that we have.
Hill: Do you like this strategy? Clearly it's paying off for shareholders. I'm just wondering if Home Depot does have some room for expansion. It doesn't seem like a business that's in any danger anytime soon in the United States of being over expanded.
Barker: Speaking as a shareholder -- I'm not a shareholder, but my wife holds them in her retirement account, so effectively I'm a shareholder -- I'm very happy with how things have been going. It has a 10-year record of 22% returns. Compound that out for 10 years, and you get a big pile of money at the end of your decade. Now, 10 years ago, 2018, subtract 10 from that, you're in the early part of 2008 and shares were weak then. It all depends, to a degree, on your starting point. But I can't complain about what they've been doing. They're a 20% stock return story year in and year out on average. And that's something that, I don't know, if that's not good enough for shareholders, then they can find riskier growth stories.
Of course, part of this is, the health of the housing market today, we could look at a lesser-known company, TRI Pointe Homes is another data point for that, that's a stock we own in our mutual fund. They have orders up 17% over the year. This is TRI Pointe, new home deliveries up 23%. Backlog is up 56%. It's still, although interest rates are moving up, and that's a concern, and TRI Pointe plays and a higher price point house, and there's some changes in the deductibility of mortgage, which might affect them. But to date, their numbers are going very well. And that's just, Home Depot is a much bigger example of the same story.
Hill: Do you think we can expect Lowe's (NYSE:LOW) quarterly results tomorrow, do you think they're going to hold serve as they've done for the last two to three years, where Home Depot comes out, puts up their numbers, and Lowe's comes out and their numbers look almost as good as Home Depot's but just not quite?
Barker: Yeah. I mean, until that narrative changes, I think that's what you should expect. I don't know of any reason to expect something different. There was a time when Lowe's was getting the job done better than Home Depot, but that time hasn't been around for the last half-decade.
Hill: I was going to say, I think that coincided with the time that Bob Nardelli was running Home Depot.
Barker: [laughs] Well, Lowe's is an outstanding company as well, and they are enjoying the same macroeconomic tailwinds and doing almost as well for shareholders.
Hill: Oh, absolutely. And in the same way that if you owned shares of Mastercard and Visa over the last 10 years, you've done really well and you almost don't care which one has done better. Same sort of thing with Home Depot and Lowe's. If you've owned both of them, you're quite happy with the returns on both.
Barker: Should we just pre-tape that part of tomorrow's episode right now?
Hill: [laughs] "Lowe's fourth quarter, pretty good, just not quite as good as Home Depot's."
Barker: "Just as we expected."
Bill Barker owns shares of Home Depot. Chris Hill has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Mastercard and Visa. The Motley Fool has the following options: short May 2018 $175 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Home Depot and Lowe's. The Motley Fool has a disclosure policy.