Home Depot (HD, Financial) is the biggest home improvement retailer in North America. The company has 2,300 stores in the United States, Canada and Mexico. Home Depot has a wide moat as the leading retailer in this space, and its sales are growing at a healthy rate.
Yet, the stock has sold off this year along with the broader market, providing a rare opportunity for value and income investors to get a more attractive entry point. At $311.96 per share as of this writing, Home Depot has a price-earnings ratio of just 19.17, below its historical median, as well as a solid and reliable dividend yield of 2.35% that has grown at a three-year annualized rate of 17%.
Analysts are concerned about Home Depot's ability to maintain its growth momentum as the housing boom winds down and consumers shift their spending back to other categories. However, Home Depot is still a strong company; here's why I believe the stock's investment outlook looks great overall, despite near-term issues.
Focused on consistent growth and success
Home Depot is known for offering a wide array of home improvement products, from lumber and tools to appliances and gardening supplies. During the booming housing market of the recent few years, revenue skyrocketed, and it managed to maintain consistent growth over the long term.
Moreover, home improvement revenue has also grown as the housing shortage steepens. Home Depot has been able to weather the ups and downs of the economy as home repair is often a necessary expense for consumers.
In addition, the company has not shied away from embracing e-commerce. The company generated $21.4 billion in net e-commerce sales in fiscal 2021, roughly 14% of all the company's net sales during that year.
Overall, the company has seen revenues grow to $151.2 billion in fiscal 2021 from approximately $74.8 billion in fiscal 2013. Net income during this same time grew to $16.4 billion from $4.5 billion.
Home Depot's consistency can be seen as a testament to the need for home repairs and the stability it brings as well. Investors should expect sales to fluctuate from year to year, yet still grow in the long term as long as people are building and repairing homes.
Solid income play
Home Depot is a well-run company that has consistently generated positive free cash flow over the past 10 years. This is important because it indicates that Home Depot is efficient in its operations, generating enough cash flow to cover its expenses and needs without raising money through debt or equity offerings. This lack of dependence on external financing sources gives Home Depot a strong financial position. It allows it to weather economic downturns better than businesses heavily reliant on borrowing.
Home Depot's positive free cash flow also gives shareholders assurance, indicating that the company will not likely experience any major financial difficulties shortly. As a result, Home Depot is a solid dividend play in my opinion. Even though there are higher yields out there, few can match Home Depot's consistency and growth. In 2022, Home Depot generated approximately $14 billion of free cash flow, quite impressive considering the heavy inventory build. Home Depot's strong free cash flow generation is one of the key drivers of the company's success and shareholder value creation. It is one of the principal reasons Home Depot has delivered a growing dividend over the years. Earlier this year, the company increased its payout by 15% to $1.90 per share, marking 12 years of consistent growth. As of July, its payout ratio of 0.38 still leaves plenty of room for future increases.
Home Depot is a great company committed to returning value to shareholders through dividends. Not only does it have a long history of increases, but it also has ample room to keep growing its payouts at an above-average rate. For these reasons, I believe Home Depot is an ideal candidate for investors looking for a dividend growth stock to buy and hold for the long term.
Home Depot is a victim of the general market pessimism
Home Depot stock is down by double digits this year. However, that doesn't mean the company isn't worth investing in. Home Depot is still trading fairly low compared to its earnings.
Home Depot has a long history of success. The company has always been profitable and consistently generated strong returns for shareholders. Furthermore, Home Depot is a market leader with a vast network of stores and a strong brand name. Lastly, the company's share price has declined this year due to inflation and inventory build-up, but Home Depot remains a well-run company with a bright future.
Takeaway
All in all, I believe Home Depot is an attractive value and income play for many reasons. First, the company has continued to grow over the years and perform well on the bottom line. Additionally, Home Depot generates significant cash flow, which it uses to reinvest in the business and pay dividends to shareholders. Finally, Home Depot has a strong brand and a large customer base. These factors all contribute to Home Depot's attractiveness.
Home Depot's inventory levels are concerning. However, this is not likely to be a long-term issue. Many retail companies face the same issue due to supply chain problems and the bad economy. Home Depot is a strong company with plenty of positives going for it in the long-term.
