Owning industry-leading companies in your portfolio can be a smart strategy. When it comes to the home improvement sector, though, this hasn't worked out well in recent times. Shares of Home Depot (HD 2.75%) have produced a trailing five- and 10-year total return that comes up short of the S&P 500 index.
This retail stock now trades 14% below its peak (as of March 4). If you're thinking about buying the dip, here are three things to know about Home Depot first.
Image source: Home Depot.
1. Home Depot is a cyclical business
Home Depot's revenue jumped by double-digit percentages in fiscal 2020 and fiscal 2021 due to cash-rich households spending on upgrades and renovations during a low-rate environment. Those gains seem like ancient history today because the last few years have not been the smoothest from a macro perspective, and the home improvement retailer has felt the pain.
It reported 3.2% revenue growth, driven by a same-store sales gain of 0.3%, in fiscal 2025 (ended Feb. 1). Higher interest rates and consumer confidence at a 12-year low are discouraging homeowners from starting expensive projects. And management has called out low housing turnover that is pressuring demand.
Between fiscal 2025 and fiscal 2028, Home Depot's revenue is expected to increase at a compound annual rate of 4.2%. That's not driving investor enthusiasm.
2. It's a top destination for professionals
Besides selling to do-it-yourself (DIY) customers, Home Depot also targets professionals: contractors, roofers, plumbers, electricians, and the like. They handle more-complex and costly projects for households, and this group is faring better than DIYers, with sales outperforming in the fourth quarter.
About half of Home Depot's net sales are derived from pros. But these people make up just 10% of the customer base. In other words, they're extremely high-value shoppers who boost the company's revenue per store.
The company has a significantly stronger standing among pros when compared to smaller rival Lowe's, which has 30% penetration. This is an advantage.
3. Dividends continue to rise
Generating profits hasn't been an issue for this business, even during the pandemic period. In the past 10 years, Home Depot's net income margin averaged 9.7%. And in the past 24 months, it collected $36 billion in operating cash flow. After reinvestment requirements are met, management returns capital to shareholders.
It has paid a dividend in each of the past 156 quarters. The current yield of 2.5% is much higher than the S&P 500's average. And over the last decade, the payout has increased by 238%. Income investors will appreciate this steadily rising source of yield.
