Shares of home-improvement retailer Home Depot (NYSE:HD) are down about 10% in the last three months, making it a good time for investors to consider whether this industry leader is worth buying. After all, the company has seen consistently strong growth in revenue, earnings per share, and comparable-store sales. Does Home Depot stock's pullback give investors an opportunity to buy a great business at a good price?

To decide whether Home Depot stock is worth buying today, here's a look at the company's recent results, its dividend, and its valuation.

A man holding a yellow level while working on a do-it-yourself project at home, with his dog watching

Image source: Getty Images.


Home Depot has been on a roll recently. In fiscal 2017, it posted 6.7% sales growth, a 6.8% increase in comparable-store sales, and a 13% jump in earnings per share. For its fourth quarter, Home Depot's revenue and comparable-store sales both grew 7.5% year over year. During this same period, its earnings per share went up 17.3% year over year when adjusted to exclude the impact of the Tax Cuts and Jobs Act and a one-time bonus payment for hourly associates. 

For comparison, competitor Lowe's (NYSE:LOW) comparable-store sales climbed 4% during fiscal 2017 and 4.1% during its fourth quarter on a year-over-year basis. 

Looking ahead, Home Depot continues to expect strong growth. The company said in its fourth-quarter earnings report that it expects revenue and comparable-store sales to be lifted by 6.5% and 5%, respectively, in fiscal 2018. In addition, management forecast a 28% hike in earnings per share during this period. Furthermore, management anticipates compounded annual sales growth between 4.5% and 6% over the next three years.


One reason some investors may be interested in Home Depot stock is its dividend. With a dividend yield of 2.2%, its dividend yield is higher than the current average dividend yield of stocks in the S&P 500 of 1.95%. In addition, Home Depot has delivered stellar double-digit dividend growth for investors for years.

Home Depot, which announced its most recent dividend increase earlier this year, boosted its quarterly dividend payouts by 15.7%. "As a testament to our commitment to create value for our shareholders and our positive outlook for the business, the board has increased the dividend for the ninth consecutive year," said Home Depot CEO Craig Menear said about the increase. 

Better yet, Home Depot has plenty of room for more dividend growth in the years ahead. it's currently only paying out 46% of its earnings -- and those earnings are on the rise. Also, its annual dividend payments equal just 42% of its free cash flow. 


With its strong fundamentals, momentum, and its leadership position in its industry, it's no surprise that Home Depot stock commands a premium valuation. Currently, its price-to-earnings ratio stands at 24 and its price-to-sales ratio is at 2.1. Comparatively, Lowe's has a P/E of 20 and a P/S of 1. Home Depot stock's valuation essentially prices in the strong revenue and earnings growth management has forecast in the coming years.

But Home Depot's more than $32 billion lead on runner-up Lowe's $68.6 billion in annual sales gives the company enviable economies of scale, making it nearly impossible for Home Depot to give up its market leadership. Home Depot's significant advantage is particularly evident in its operating margin of 14.5%, which is far superior to Lowe's operating margin of 9.6%. 

Sure, Home Depot may have been a bit risky at the 28 P/E its stock sported just three months ago. But with a more reasonable P/E of 24 today, this is an attractive entry point for investors

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.