Home Depot (HD +0.03%) stock popped 2.8% on Tuesday despite reporting weak fiscal 2024 results and fiscal 2025 guidance.
In addition to its results, Home Depot announced a mere 2.2% dividend raise, which was the smallest increase since the home improvement company began raising its payout in 2010.
Here's why the Dow Jones Industrial Average component is still worth buying despite what is likely to be another sluggish year of earnings growth.
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Slowing dividend growth
Over the last 15 years, Home Depot grew its dividend and earnings at a torrid rate. Its stock price reflected that growth.
Even as Home Depot's earnings growth slowed in the last few years, it still made sizable dividend raises. In 2024, Home Depot raised its dividend by 7.7%. It boosted its payout by 10% in 2023, 15.2% in 2022, 10% in 2021, and 10.3% in 2020.
Needless to say, investors had grown accustomed to substantial dividend increases from Home Depot. So, the latest increase of 2.2% marked a noticeable step change. It embodied the extent of Home Depot's downturn, which has been dragging on for years.
Home Depot's lack of earnings growth in recent years and dividend increases caused its payout ratio to balloon to 60%. That's still a healthy level for an industry leader, but it's far higher than Home Depot's average over the last 15 years.
HD Payout Ratio data by YCharts
In this vein, it was probably best that the company made a small dividend raise to ensure the dividend expense didn't become too much to manage. By keeping the payout ratio reasonable, Home Depot can grow the dividend at the same rate as earnings. For example, if Home Depot recovers and grows earnings by 10%, it can boost the dividend by 10% without increasing its payout ratio.
Weak expectations
If you've tuned into Home Depot earnings calls, chances are you are familiar with the candid delivery of Home Depot's management team. Home Depot tends to give a straightforward perspective on the current state of the business and near-term outlook -- with few theatrics or inflated promises.
Home Depot is guiding for just 2.8% total sales growth in fiscal 2025 and 1% comparable 52-week sales growth (fiscal 2024 had an extra week). Diluted earnings per share (EPS) is expected to fall 3%, while adjusted diluted EPS is expected to be down 2%.
For context, Home Depot earned $14.91 in fiscal 2024 diluted EPS, and $15.24 in adjusted diluted EPS. In fiscal 2023, it earned $15.11 in diluted EPS and in fiscal 2022, it earned $16.69 in diluted EPS compared to $15.53 in fiscal 2021. This means that fiscal 2025 earnings are expected to be lower than results from four years ago. Granted, the pandemic brought forward demand and caused an unsustainable spike in earnings. Still, Home Depot is going on year four of earnings going nowhere, which is concerning for investors who thought the company would have turned things around by now.
Maintaining a long-term mindset
If Home Depot hasn't been growing earnings for a few years and is expected to see earnings fall slightly in the coming fiscal year, why is the stock price holding up so well?
The answer likely involves separating Home Depot (the company) from Home Depot (the stock).
Home Depot's weak results have nothing to do with management's execution or the investment thesis. Rather, there's an industrywide slowdown in consumer spending and home improvement projects impacted by high interest rates, high mortgage rates, record credit card debt, relatively unaffordable housing, and other macroeconomic factors.
Despite these challenges, Home Depot's results are holding up well. The business may not be growing, but it's also not seeing earnings go down by that much either. Patient investors who are buying and/or holding Home Depot for the long term won't mind a cyclical slowdown. Rather, they may choose to simply keep the shares, collect the 2.3% dividend yield, and wait for the broader industry to recover -- knowing that Home Depot is well positioned to capitalize on a rebound when it does occur.
Based on fiscal 2025 guidance, Home Depot expects to earn $14.94 in adjusted diluted EPS -- implying a forward price-to-earnings ratio of 26.3 based on the stock price at the time of this writing. That is far from an inexpensive valuation, even for a blue chip dividend stock like Home Depot.
Home Depot is worth buying and holding
Value investors may prefer to buy dividend stocks other than Home Depot. However, patient investors willing to pay a premium price for a quality company may still want to consider the stock.
Home Depot has made numerous long-term investments that could make it a tightly wound, coiled spring for growth once the industry recovers. In 2024, Home Depot bought SRS Distribution for $18.25 billion as a play on professional customers and contractors. Meanwhile, it continues to expand, including opening 13 new stores in fiscal 2025.
In sum, Home Depot remains committed to long-term growth even during a downturn. Given the slowdown, the impact of its investments likely hasn't been fully realized in its recent results. So, it stands to reason that Home Depot could unlock a new gear during the next expansion period.
Add it all up, and Home Depot remains a buy now for investors who don't mind a prolonged slowdown in the home improvement industry.
