Buying well-run businesses operating in massive industries is a formula for success as a dividend growth investor. That's because huge addressable markets allow for quality companies to find ways to continue growing their sales and profits, which can also lead dividends upward over time.
Having recently boosted its quarterly dividend per share by 10% to $2.09, the leading home improvement retailer known as Home Depot (HD 0.94%) is a no-brainer pick for investors seeking growing passive income. Here are three reasons why.
1. Competitive advantages equal high profit margins
Given the $157 billion in sales that analysts expect for the current fiscal year, Home Depot commands around 16% of the $1 trillion North American home improvement retail market. For context, that is significantly more than Lowe's (LOW -0.04%) roughly 10% market share.
Home Depot's superior size over Lowe's is the byproduct of its greater appeal to professional contractors. For one, the former's brand offerings are perceived to be superior to the latter's. Home Depot also holds a marginal advantage in bulk pricing over Lowe's. This is why the former's total pro sales mix is around half of its business, whereas the latter's total pro sales mix is about a quarter of its business.
HD Profit Margin data by YCharts
Since pros spend more heavily and frequently than do-it-yourselfers, it's no surprise that Home Depot enjoys much greater profit margins than Lowe's.
Home Depot recorded $35.8 billion in sales during the fourth quarter ended Jan. 29., which was a 0.3% year-over-year growth rate. What was behind these results?
The company's comparable sales decreased 0.3% over the year-ago period for the fourth quarter. Home Depot's average ticket edged 5.8% higher year over year to $90.05 in the quarter, but the gain was mostly offset by a 6% drop in customer transactions over the year-ago period as spending from do-it-yourselfers cooled. Finally, a slight increase in Home Depot's store count to 2,322 retail stores throughout the U.S., Puerto Rico, Canada, and Mexico led to a bump in sales during the quarter.
The home improvement retailer reported $3.30 in diluted earnings per share (EPS) for the fourth quarter, which equates to a 2.8% year-over-year growth rate. Home Depot's net margin remained stable at 9.4% in the quarter. Along with a 2.4% reduction in its outstanding share count, that explains how the company's diluted EPS grew at a faster clip than sales during the quarter.
Image source: Getty Images.
2. Strong dividend growth could persist
Home Depot's 2.8% dividend yield is far above the S&P 500 index's 1.7% yield. As if that weren't enough, the company boosted its dividend by a double-digit rate the last 13 dividend raises. And this streak seems poised to continue for the foreseeable future.
That's because Home Depot's dividend payout ratio is set to clock in below 53% for the current fiscal year. This should leave enough capital for the company to invest in future growth opportunities and repay its debt.
3. The stock is a decent value
Home Depot seems to be a solid value for dividend growth investors. This may seem paradoxical considering that the stock's forward price-to-earnings (P/E) ratio of 17.5 is higher than the home improvement retail industry average forward P/E ratio of 16.8. But factoring in Home Depot's unmatched size and scale, this is arguably a reasonable premium to pay for the stock.
