Home Depot Will Spruce Up Your Home And Portfolio With Excellent Dividends

Apr.17.14 | About: Home Depot, (HD)

Summary

The stock is inexpensively valued on next year's earnings estimates.

The stock is experiencing bullish technicals.

The company increased its return on equity to an astounding 36.8%.

The last time I wrote about The Home Depot, Inc. (NYSE:HD) I stated, "What troubles me for now is that the stock is fairly valued, the dividend is too tiny to make me hide out in this name, and the bearish technicals. It's for these reasons I will not be adding to my position now because I think I can get it at a lower price." Since the last article, it dropped 3.28% versus the 3.18% gain the S&P 500 (NYSEARCA:SPY) posted.

On February 25, 2014, the company reported fourth quarter earnings of $0.73 per share, which beat the consensus of analysts' estimates by $0.02. In the past year, the company's stock is up 4.02% excluding dividends (up 6.1% including dividends), and is losing to the S&P 500, which has gained 17.21% in the same time frame. With all this in mind, I'd like to take a moment to evaluate the stock on a fundamental, financial and technical basis to see if it's worth buying more shares of the company right now for the services sector of my dividend portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 20.42, which is fairly priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the one-year forward-looking P/E ratio of 14.93 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $5.13 per share and I'd consider the stock inexpensive until about $77. The 1-year PEG ratio (1.31), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is fairly priced based on a 1-year EPS growth rate of 15.63%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 15.63%. In addition, the company has great long-term future earnings growth potential with a projected EPS growth rate of 16.43%. Below is a comparison table of the fundamental metrics for the company from the time I wrote the last article to what it is right now.

Article Date

Price ($)

TTM P/E

Fwd P/E

EPS Next YR ($)

Target Price ($)

PEG

EPS next YR (%)

04Sep13

74.10

21.97

17.12

4.35

65

1.23

17.91

23Nov13

79.18

23.36

18.12

4.37

65

1.28

18.20

16Apr14

76.58

20.42

14.93

5.13

77

1.31

15.63

Click to enlarge

Financials

On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 2.45% with a payout ratio of 50% of trailing 12-month earnings while sporting return on assets, equity and investment values of 12.6%, 36.8% and 22.3%, respectively, which are all respectable values.

The really high return on equity value (36.8%) is an important financial metric for purposes of comparing the profitability, which is generated with the money shareholders have invested in the company to that of other companies in the same industry (for comparison purposes, Home Depot is tops in the industry followed by Lumber Liquidators (NYSE:LL) which sports a ROE of 32.9% and Lowe's (NYSE:LOW) which sports a ROE of 17.9%).

Because I believe the market may get a bit choppy here and would like a safety play, I don't believe the 2.45% yield of this company is good enough for me to take shelter in for the time being. The company has been increasing its dividends for the past five years at a five-year dividend growth rate of 11.6%. Below is a comparison table of the financial metrics for the company from the time of the last article to what it is right now.

Article Date

Yield (%)

Payout TTM (%)

ROA (%)

ROE (%)

ROI (%)

04Sep13

2.09

43

11.8

29.6

17.8

23Nov13

1.97

46

11.8

29.6

17.8

16Apr14

2.45

50

12.6

36.8

22.3

Click to enlarge

Technicals

Click to enlarge

Looking first at the relative strength index chart (RSI) at the top, I see the stock bouncing off of oversold territory back on 11Apr14 with a current value of 38.67. I will look at the moving average convergence-divergence (MACD) chart next. I see that the black line is below the red line with the divergence bars increasing in height, indicating some bullish momentum. As for the stock price itself ($76.58), I'm looking at $77.43 to act as resistance and $75.72 to act as support for a risk/reward ratio which plays out to be -1.12% to 1.11%.

Recent News

  1. March retail sales were solid. Building material and garden equipment sellers such as Home Depot and Lowe's were beneficiaries to the trend and this should bode well for the company when it reports shortly.
  2. Wal-Mart (WMT) is going to go head-to-head with the home improvement store. Wal-Mart slashed prices and expanded offerings in the outdoor living and garden segments.

Conclusion

Consumers are still looking to spruce up their homes with increased building material and garden equipment growth during March. Building materials increased 1.8%, furnishing increased 1%, and general merchandise increased 2%. Fundamentally, the company is inexpensively priced based on future earnings but fairly priced on future growth potential. Financially, the dividend is growing and secured by earnings while the return on equity is increasing. On a technical basis, I believe there is some bullish momentum. Due to the bullish technicals, increasing return on equity and inexpensive valuation based on 2015 earnings I'm going to be pulling the trigger on a batch of this particular name right now.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am long HD, LL, SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.