Home Depot (HD 2.75%) has long been the leader in the home improvement industry. Thanks to an expanding store footprint, rising revenue, and improving profitability, this business has done a wonderful job at rewarding shareholders over the long term.
In the last five years, shares of Home Depot have roughly doubled. Can this top dividend stock double again in the next five? It's certainly in the realm of possibilities. Here's why.
Favorable capital allocation
That trailing five-year return is even higher when considering Home Depot's dividend. The yield currently stands at over 2.3%, which is a healthy payout that could entice investors looking for income.
It's certainly encouraging to know that Home Depot has paid a dividend since 1987. But what's even more impressive is that the quarterly payout has skyrocketed over 4,000-fold in the last 36 years. Shareholders currently receive $2.09 every three months.
And there's no reason to worry about Home Depot's ability to continue this trend. Even during the great financial crisis in the late 2000s, as well as throughout the coronavirus pandemic, the company continued its dividends.
This demonstrates how financially sound Home Depot is. The company is consistently profitable, no matter what the economic backdrop looks like. This reduces risk from an investment perspective.
During the first three quarters of 2023 (ended Oct. 29), Home Depot paid $6.3 billion in dividends, which represented 38% of its operating cash flow. This leaves plenty of cushion should the financials take a hit.
For what it's worth, Home Depot also engages in share buybacks. The outstanding share count has shrunk by 30% between the end of fiscal 2014 and the end of the last quarter.
NYSE: HD
Key Data Points
What matters most?
In order for the stock to double over the next five years, which translates to a superb 15% annualized gain, there are some things that need to go right.
For starters, Home Depot must get back to posting revenue growth. This has been a challenge recently due to ongoing macroeconomic headwinds. Higher interest rates caused home sales to tank in 2023. As fewer people might be moving, they probably aren't focused as much on home renovations. And the inflationary environment that's squeezing consumer wallets has pressured spending on big-ticket items and more complex renovation projects.
The result is that management expects same-store sales to decline between 3% and 4% this fiscal year, an extremely rare occurrence for this business. The hope is that Home Depot is just dealing with temporary issues.
Management is still incredibly optimistic if we look at the bigger picture. "When we do get through this period of moderation, we remain incredibly bullish," said CEO Ted Decker on the Q2 2023 earnings call.
His confidence stems from industry conditions. The popularity of remote working setups, aging homes, and a shortage of new housing supply are all favorable conditions for Home Depot.
As of this writing, shares of this top retailer remain 15% below their peak price. And they seriously underperformed the broader S&P 500 in 2023. So the stock is still trading at a reasonable price-to-earnings ratio of 22.8. This is about in line with its average over the last five years.
For investors who can look past the near-term challenges, it looks like a smart idea to consider adding Home Depot to your portfolio. The stock has a good shot at doubling over the next five years.
