Both The Home Depot (NYSE:HD) and Sherwin-Williams (NYSE:SHW) have benefited from the housing market's recovery since the Great Recession, and even in more-recent periods have seen strong sales.

Investors seem to think both stocks have equally bright prospects, as they're only a few percentage points apart in the gains they've made over the past year. After the companies saw a slow start to 2018 thanks to unfavorable weather, it's now a more-amenable season for the two companies. Let's take a look to see which stock is the better buy.

A Home Depot garden department employee works with plants

Image source: The Home Depot.

The case for Home Depot

On track to crack $100 billion in sales this year, Home Depot is flush with green that keeps it comfortably ahead of rival Lowe's (NYSE: LOW), which recently installed a new CEO to help spur growth. 

Reliance upon professional contractors has long been a feature that separates Big Orange from the competition. And in its first-quarter earnings conference call, CEO Craig Menear said that this is still the case, noting that "investments aimed at deepening our relationship with our pro customers are yielding increased engagement, which translates to incremental spend."

Included in those investments is the $11 billion it will be spending over the next three years on its stores, digital platforms, and supply chain to facilitate delivery of products, including to job sites, in as little as 24 to 48 hours. Home Depot is building 170 distribution centers, 40 flatbed distribution centers for contractor deliveries, and 100 hubs for home delivery of larger products like appliances.

Whether consumers will see Home Depot as an outlet for soft goods remains uncertain, although it's trying with its acquisition of online home furnishings retailer The Company Store. It shows that Home Depot is willing to bet on its capabilities as a digital player. Its website drives a majority of its sales, and that will only grow as it expands its web presence.

Painter painting window trim

Image source: Getty Images.

The case for Sherwin-Williams

Like Home Depot, Sherwin-Williams is a beacon for professional contractors. But its acquisition last year of Valspar and its exclusive paint-supplier deal with Lowe's should give it a more balanced performance with consumers. Sherwin-Williams is also gaining pricing power and economies of scale, particularly as it increases its exposure to international growth markets.

That doesn't always work out, as shown by the wreck that Latin American economies are becoming. That partly held back the company this past quarter. It was also beset by a surprise increase in raw materials costs that lasted longer than anticipated. That increase may impact margins slightly, depending on how long it goes on.

Yet Sherwin-Williams has a remarkable record of paying investors to be patient, and has increased its payout to them for 40 consecutive years. The stock yields about 0.77% at the current share price. Home Depot also has a growing history of dividend hikes, and its stock yields about 2.1%.

The verdict

With the gains both stocks have made over the past year, let alone the previous decade, neither company is a cheap stock. Shares of Home Depot and Sherwin-Williams trade at multiples that are much higher than the market and their peers across various metrics.

Home Depot leads rival Lowe's, and it should easily be able to continue doing so as Lowe's integrates a new CEO. But by branching out in new directions -- making acquisitions, building out facilities, and dealing with a maturing housing market -- Home Depot introduces risks into the equation.

In comparison, Sherwin-Williams has lapped its big acquisition and remains the premier partner for professionals while expanding its reach into the consumer market. It faces its own risks in rising raw materials costs and in geographic uncertainty in Latin America.

Neither stock is an easy choice at this juncture, but I'd say the scales tip in favor of Home Depot ever so slightly because of its higher yield.



Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has the following options: short September 2018 $180 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Home Depot and Sherwin-Williams. The Motley Fool has a disclosure policy.