Home Depot (HD -0.51%) just gave investors a slew of updates about its business momentum heading into 2024. The home improvement retailer's fourth-quarter report contained more than just a look back at the previous three months, too. Management also outlined its official 2024 outlook, including details on its operating results and its capital return plans.

The report was mostly positive, although there were some yellow flags for investors to take note of if they're considering buying this stock. Let's take a closer look.

Comps are down

Home Depot took a step backwards on growth this year as interest rates rose and the housing market cooled. Comparable-store sales (comps) fell 4% in the core U.S. market after rising by 3% in 2022. Looking closer, there are mixed signs around the potential for a rebound ahead.

On the bright side, those negative comps were partly driven by deflation in the core lumber category. That's not likely to repeat in 2024 and beyond, thankfully. But customer traffic was negative for a second straight year in 2023. Home Depot served 3% fewer guests after traffic fell 5% in 2022. It will be hard to engineer a growth rebound when customer traffic and average spending levels are both declining.

The good news

There's plenty of good financial news, on the other hand. Cash flow and profit margins remain strong and reflect Home Depot's premium position in its competitive industry. The chain converted 14.2% of sales into operating income this past year, which was slightly below its pandemic peak of about 15% of sales. Profitability at rival Lowe's Companies is closer to 13% of sales, for context.

This success helped Home Depot protect earnings despite rising costs and higher interest expenses. Still, investors shouldn't expect a quick rebound ahead for profit margins. CEO Ted Decker and his team are calling for operating profit to land at roughly 14.1% of sales in 2024 as comps slip for a second straight year.

Dividend and price

Buying Home Depot stock could make sense for investors who want to take advantage of market pessimism in the home improvement niche. Yet the stock isn't especially cheap. Shares are valued at 2.4 times sales today, a post-pandemic high. The same is true for the price-to-earnings ratio of 23, compared to the low of 18 set back in late October. Home Depot's stock has underperformed the market in the past year, yet you're still paying a decent premium to own this business.

Direct cash returns will help pad your returns, however. That's because Home Depot generated ample free cash flow this year even though earnings declined. As a result, management had the resources it needed to fund a generous 8% dividend increase for 2024. That's a bit below the 10% hike that investors enjoyed in 2023, but it is still a solid raise in today's soft demand environment.

When to buy

Home Depot still seems expensive as an income-producing investment given its soft earnings and growth outlook. That's why investors might be better off watching this stock for now until shares become cheaper amid a broader market downturn or rising pessimism about the home improvement industry.

In the meantime, a return to customer traffic growth is the metric to watch that would signal a sales rebound on the way. Until then, most investors will want to keep Home Depot on their watch lists.