Home Depot (HD +0.55%) has made for a fine investment in the past. Its shares produced a 462% total return in the last 10 years, effectively turning a $10,000 investment into more than $56,000 during that time. That's a superb gain.
But can this top-retail stock double your money over the next 10 years? Continue reading to see if this roughly 7% annualized gain, which would be a marked slowdown from the past, is in the realm of possibilities.
Easy to be pessimistic
It's been a difficult time for Home Depot in the past couple of years. Ever since inflation started rearing its ugly head in dramatic fashion in late 2021, coupled with the Federal Reserve's aggressive rate-hiking policy that started in early 2022, the company has experienced pressured demand from consumers.
When economic uncertainty is prevalent, as has been the case in the U.S., people will undoubtedly delay making big-ticket purchase decisions. One of these decisions deals with whether or not to take on a renovation project. I'm sure the thinking centers on waiting until the economic picture looks more favorable.
Revenue declined 3% in fiscal 2023 (ended Jan. 28) before falling 2.3% in the most recent quarter (the first quarter of 2024 ended April 28). And the leadership team forecasts same-store sales to dip 1% for the current fiscal year. Perhaps this helps explain why shares are currently 12% below their 2024 peak price.
NYSE: HD
Key Data Points
Look out over the long term
It's not all bad news, however. Investors looking to own the stock for the next decade should focus on the factors that matter most to the business over the long term.
Home Depot still possesses a sizable growth runway as we look ahead. The massive $1 trillion home-improvement industry is very fragmented. And this company possesses the scale, brand awareness, and wide reach to serve more customers. In fact, 90% of the U.S. population lives within 10 miles of a Home Depot store. Add this to nationwide-marketing capabilities and broad-inventory availability, and it's not hard to see why this company has the right to take market share.
The near-term headwinds should eventually abate as the macro backdrop becomes more accommodative. Home Depot has successfully weathered recessions in the past, most notably the housing meltdown about 15 years ago. There's no reason to believe it can't handle whatever comes its way.
The company is consistently profitable as well, reducing financial risk for prospective investors. In the past five years, Home Depot's operating margin has averaged 14.5%. Management has used earnings to pay a steadily rising-dividend payout, as well as repurchase huge amounts of shares. This favorable capital-allocation policy isn't going to change.
A conservative outlook
Over very long periods of time, the S&P 500 has risen at an average yearly pace of about 10%. So, investors would be expecting Home Depot to underperform this historical gain over the next decade. When viewed in this light, I think it's totally reasonable to see the stock price double by 2034.
Shares have risen twofold in the past six-and-a-half years. And in the last decade, the stock has climbed more than fivefold, an impressive gain, thanks to a healthy fundamental performance.
Given the scale of this business, with fiscal 2023 sales of $153 billion and a market cap of $342 billion, I think the right perspective is to assume that the returns going forward won't resemble those of the past.
But investors can have confidence that Home Depot shares can increase by 7% per year in the foreseeable future, leading to a double in a decade's time. This is a high-quality and profitable enterprise with a supportive industry structure that will work to its benefit.
