Home Depot stock (NYSE:HD) has been affected by cyclical headwinds lately, as consumer spending on home improvement has eased in the post-pandemic era. Being by far the largest retailer in the home improvement industry, Home Depot has not been immune to this shift. Still, I believe that the company’s growth prospects are strong. In fact, the company’s dividend growth story remains intact, with plenty of room for management to sustain above-average increases ahead. Accordingly, I am bullish on HD stock.
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Home Depot’s Growth Freeze: What’s Causing It?
Home Depot’s growth has frozen lately, and there is a very simple explanation as to why. Home Depot, like many retailers, experienced a surge in sales during the COVID-19 pandemic as consumers turned to home improvement projects while spending more time at home. However, as the world entered the post-pandemic era, the company’s growth began to freeze due to two key factors.
First and foremost, excess consumer spending during the pandemic led to a saturation of demand in home improvement, causing a natural slowdown in sales growth. With many individuals having already invested heavily in their homes, there is now less immediate need for further renovations or repairs.
Secondly, the economic uncertainties brought about by the pandemic (i.e., a shaky macroeconomic landscape these days) have led to a cautious approach to spending among consumers, causing them to prioritize essential purchases over discretionary home improvement expenses.
Evidently, Home Depot’s most recent Q2 results illustrated this theme. The company posted a revenue decline of 2% year-over-year to $42.9 billion. With Home Depot’s store count remaining relatively stable between the two periods (2,324 compared to 2,316 in Q2 2022), the company’s top-line decline directly reflected lower same-store sales, which also declined by 2%. This directly reflects the sluggish demand for home improvement products after two years of exceptional results boosted by the pandemic.
Notably, this was the second consecutive quarter of declining sales for the company. The last time the company posted back-to-back quarters of declining sales was during the Great Financial Crisis! Of course, the current situation is nowhere nearly as disastrous as that of that time. Still, it makes for an interesting point of reference relative to Home Depot’s otherwise consistent growth.
Strong Profitability Sustains Dividend Growth Story
Despite the recent dip in Home Depot’s profitability, it’s crucial to note that Home Depot’s dividend growth story remains strong. Revenues did decline, but the company successfully maintained a robust operating margin of 15.4%. Although this marks a slight decline from the previous year’s 16.5%, the bottom line wasn’t badly affected. Notably, HD’s Q2 EPS of $4.65 only recorded a modest 7.9% year-over-year decrease.
The first indication that Home Depot’s profitability remains quite strong is management’s latest dividend increase, which was in the double digits. Importantly, this increase occurred early in 2023 despite management knowing the company was heading into a weaker year. The dividend was raised by 10% to a quarterly rate of $2.09, marking the 14th consecutive annual increase. This move reflects management’s confidence in the sustainability of dividend payments and the company’s future earnings growth.
Let’s quantify this. Home Depot’s management expects that EPS is set to decline by a rate between 7% and 13% compared to Fiscal 2022. Assuming a decline of 10% (the midpoint of this range), EPS should land close to $15. Despite the combination of a 10% dividend hike against an equally strong fall in earnings, Home Depot’s payout ratio would still stand at a healthy 56%.
Additionally, Wall Street predicts mid-single-digit EPS growth in the coming year, driven by a recovering home improvement industry and Home Depot’s ongoing share buybacks (2.1% decrease in share count year-over-year in Q2). This reaffirms Home Depot’s potential for continued dividend growth.
Overall, while the current 2.7% yield may seem modest, combined with Home Depot’s consistent dividend increases, it’s poised to contribute significantly to the stock’s long-term returns.
Is HD Stock a Buy, According to Analysts?
As far as Wall Street’s view on the stock goes, Home Depot features a Moderate Buy consensus rating based on 15 Buy and eight Hold recommendations assigned in the past three months. At $350.74, the average Home Depot stock price target suggests 15.6% upside potential.
If you’re wondering which analyst you should follow if you want to buy and sell MA stock, the most profitable analyst covering the stock (on a one-year timeframe) is Scot Ciccarelli from Truist Financial, with an average return of 19.21% per rating and an 81% success rate.
The Takeaway
In conclusion, Home Depot’s recent deceleration stems from demand saturation post-COVID-19 and cautious consumer spending. However, the company’s strong profitability, as evidenced by a resilient operating margin and a modest decline in its most recent earnings report, underscores its ability to weather challenging times.
In the meantime, Home Depot’s commitment to sustaining its dividend growth story, with a recent double-digit increase and a healthy payout ratio, reaffirms the long-term potential for rising payouts. Despite the current modest yield, the stock’s consistent dividend hikes make it an attractive choice for investors seeking a healthy mix between income and growth.
