Home Depot (HD 0.94%) has historically been a winning investment over long periods of time. It's not difficult to see why.
This leading home improvement chain benefits from some favorable industry trends, like the popularity of remote work, an aging housing stock, and the tight inventory of home supply that encourages people to stay longer in their existing dwellings.
Plus, Home Depot has steadily increased its revenue and earnings over the years. This consistent financial performance has allowed the business to return capital to its shareholders.
But what does the future hold? Can this top dividend stock double in the next five years? Let's take a closer look at Home Depot.
Return capital to shareholders
Right now, this retailer pays a dividend that yields 2.95%. That may or may not be too enticing for some, but it's worth mentioning that since 1981, Home Depot has paid a rising dividend.
To be fair, dividend hikes were put on pause during the Great Recession to conserve cash during what was a huge housing meltdown. However, since the start of 2010, Home Depot has continued to raise its payout in each fiscal year. This is something that income-seeking investors can certainly get excited about.
I don't think there's any reason for shareholders to get worried about Home Depot not being able to pay its dividends. Through the first two quarters of fiscal 2023, the total dollar amount paid in dividends of $4.2 billion represented just 35% of operating cash flow. This leaves plenty of cushion should the financials take a hit.
Moreover, Home Depot is a squarely profitable enterprise. Achieving positive net income each year isn't an issue. The company even produced $12.9 billion in profit in fiscal 2020, which was when the pandemic upended many retail businesses.
And Home Depot's operating margin has averaged 14% in the past 10 years. That's much better than rival Lowe's. This gives me confidence that Home Depot's dividends aren't going anywhere.
Home Depot's prospects
Investors need to think about the factors that would propel this stock to double in the next five years. The combination of all of the following can help the cause.
First, Home Depot needs to continue growing its revenue. Right now, this is a challenge, as macro headwinds hurt customers and their willingness to spend on big-ticket items. Management expects sales to fall between 2% and 5% this fiscal year.
It's not all bad news, however. I talked earlier about positive industry tailwinds that can benefit demand trends for Home Depot over the long term. The leadership team is optimistic.
"When we do get through this period of moderation, we remain incredibly bullish on the sector," CEO Ted Decker said on the second-quarter 2023 earnings call. "We couldn't feel better about the macro for housing and home improvement and our prospects and ability to keep taking share in this huge and still largely fragmented market."
Thanks to operating leverage, Home Depot has historically been able to expand its margins, increasing earnings at a faster clip than the top line. Operational improvements, such as bolstering the supply chain and improving omnichannel capabilities, have resulted in greater store volume. It's not a stretch to believe that this can continue.
Valuation is another critical component of the equation. Right now, Home Depot's stock trades at a trailing price-to-earnings (P/E) ratio of just 17.7. That's well below its past 10-year average of 22.2. The market seems to be overly pessimistic about this retailer.
For comparison's sake, Lowe's shares sell for a P/E multiple of 24.7. And the average company in the S&P 500 trades at a P/E ratio of 19.2. Should an industry-leading, competitively advantaged, extremely profitable business like Home Depot deserve a higher valuation multiple than the one it currently has? I think the answer is yes.
Because of all these factors, I don't think it's a stretch that Home Depot's shares can double between now and the end of 2028. Investors who feel this way shouldn't hesitate to buy the retail stock.
