In late February, shareholders of the most important residence enchancment retailer, Residence Depot ( HD -2.26% ), had been rewarded with a 15.2% increase within the quarterly dividend to $1.90 per share. Regardless of this beneficiant payout elevate, shares of the inventory have tumbled 23% 12 months so far in comparison with the S&P 500‘s 5% decline throughout that point.
So ought to dividend progress traders purchase Residence Depot’s inventory within the aftermath of its plunge in share worth? Let’s dig into the inventory’s fundamentals and valuation.
One other wholesome quarter for the house enchancment retailer
When Residence Depot shared its fourth-quarter outcomes for the interval ended Jan. 30, it managed to beat analysts’ consensus estimates. The corporate reported $35.7 billion in internet gross sales, up 10.7% over the year-ago interval. This simply topped the typical analyst estimate of $34.9 billion in income for the quarter. Residence Depot’s whole comparable gross sales (or comps) had been up 8.1% 12 months over 12 months.
So how did Residence Depot surpass the analysts’ forecasts for the ninth quarter out of the previous 10? President and Chief Working Officer Ted Decker factors to energy throughout the board. In his opening remarks within the recent earnings call, he stated that each one of its merchandise departments posted optimistic comps within the fourth quarter.
This was largely as a consequence of Residence Depot’s main market share amongst skilled contractors, which account for many big-ticket comp transactions (i.e., these over $1,000). An 18% year-over-year enhance in these transactions throughout the quarter helped to make up for the three.8% decline in whole comp transactions.
On high of upper comparable gross sales, Residence Depot additionally had extra shops than a 12 months in the past. Retailer depend elevated 0.9% to 2,317 on the finish of the fourth quarter.
Turning to the underside line, Residence Depot recorded $3.21 in diluted earnings per share (EPS) throughout the fourth quarter, representing a 21.1% year-over-year progress charge. This surpassed the typical analyst prediction of $3.20 for the quarter, which was the ninth outing of the final 10 quarters that the corporate managed such a feat.
Except for the upper internet gross sales, earnings progress was the results of a few components as properly. First, the net margin elevated 50 foundation factors 12 months over 12 months to 9.4% for the fourth quarter. Secondly, Residence Depot’s weighted common share depend fell 3.2% 12 months over 12 months to 1.04 billion within the quarter as a consequence of its share repurchase program.
As a result of financial reopening, Residence Depot expects simply slightly positive sales growth and low-single-digit diluted EPS progress in 2022. However due to the strong housing market, analysts are nonetheless anticipating Residence Depot to ship 14.6% annual earnings progress over the subsequent 5 years.
The most secure dividend is the one which was simply raised
Residence Depot’s nice fourth quarter and respectable medium-term progress outlook solely partly clarify its large dividend hike. The inventory’s dividend payout ratio appears to be the opposite a part of the equation.
Residence Depot’s dividend payout ratio was simply 43% in 2021. For one, this supplies the corporate with a buffer to keep up its payout if the economic system had been to expertise a downturn. This additionally provides Residence Depot the pliability to proceed with its share buybacks and acquisitions to drive diluted EPS greater.
Residence Depot’s low-teens annual earnings progress potential and protected payout ratio ought to enable for a minimum of low-double-digit annual dividend progress for the foreseeable future. And because the cherry on high, the inventory presently boasts a market-topping 2.4% dividend yield.
A reduced blue-chip dividend progress inventory
Residence Depot’s sell-off this 12 months seems to have introduced the inventory’s valuation down from being somewhat rich to undervalued. For context, Residence Depot’s ahead price-to-earnings (P/E) ratio of 19.5 matches the S&P 500’s P/E ratio. An amazing inventory corresponding to Residence Depot deserves to be buying and selling at a average premium to the market, for my part.
The inventory’s trailing 12-month dividend yield of two.2% can be barely greater than the 13-year median of two% — one other indication that the inventory is a purchase for dividend progress traders.
This text represents the opinion of the author, who could disagree with the “official” advice place of a Motley Idiot premium advisory service. We’re motley! Questioning an investing thesis – even considered one of our personal – helps us all suppose critically about investing and make choices that assist us turn into smarter, happier, and richer.