Building A Dividend Portfolio With Home Depot

May.24.14 | About: Home Depot, (HD)

Summary

The company has been increasing dividends for the past five years and is poised to continue that streak.

The yield is a bit low for some dividend investors tastes, but the payout ratio is only at 50%.

The company has the best return on equity among the home improvement stores industry.

The last time I wrote about The Home Depot, Inc. (NYSE:HD) I stated, "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." Since the last article, it popped 3.4% versus the 2.04% gain the S&P 500 (NYSEARCA:SPY) posted.

On 20May14, the company reported first quarter earnings of $0.96 per share, which missed the consensus of analysts' estimates by $0.03. In the past year, the company's stock is up 3.02% excluding dividends (up 5.1% including dividends), and is losing to the S&P 500, which has gained 13.98% 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 21.11, 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 1-year forward-looking P/E ratio of 15.48 is currently fairly priced for the future in terms of the right here, right now. The 1-year PEG ratio (1.34), 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 15.75%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 15.75%. In addition, the company has great long-term future earnings growth potential with a projected EPS growth rate of 16.48%. Below is a comparison table of the fundamental metrics for the company for when I wrote all articles pertaining to the company.

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

23May14

79.18

21.11

15.48

5.12

77

1.34

15.75

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 2.37% 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 Home Improvement Stores industry followed by Lumber Liquidators (NYSE:LL) which sports an ROE of 30.5% 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 2.37% yield of this company alone is good enough for me to take shelter in for the time being. The company has been increasing its dividends for the past 5 years at a 5-year dividend growth rate of 11.6%. Below is a comparison table of the financial metrics for when I wrote all articles pertaining to the company.

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

23May14

2.37

50

12.6

36.8

22.3

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Technicals

Click to enlarge

Looking first at the relative strength index chart [RSI] at the top, I see the stock in middle ground territory with upward trajectory. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is above the red line with the divergence bars increasing in height, indicating some bullish momentum. As for the stock price itself ($79.18), I'm looking at $82.24 to act as resistance and the 50-day simple moving average (currently $78.36) to act as support for a risk/reward ratio which plays out to be -1.04% to 3.86%.

Recent News

  1. The company declared a quarterly dividend of $0.47 per share. The ex-date for the dividend is 03Jun14 with a pay date of 19Jun14 and forward yield of 2.39%.
  2. The company reported first quarter earnings on 20May14 which missed estimates on both the top and bottom lines. Earnings came in at $0.96 per share on revenue of $19.7 billion versus expectations of $0.99 per share and $19.95 billion.
  3. Though the stock dropped initially on the news, it recovered nicely on the account of the executives saying sales lost in the quarter were due to the weather and will be made up in the second quarter. May sales have been strong thus far and bodes well for that second quarter promise.

Conclusion

Although the company missed estimates this time around, it maintained its sales growth forecast of 48% for the year and raised its full-year guidance to $4.42 per share from $4.38. Fundamentally, the company is fairly priced based on next year's earnings and on future growth potential while having great near- and long-term earnings growth potential. Financially, the dividend is growing and secured by earnings while the return on equity is large and tops in the industry. On a technical basis, I believe there is some bullish momentum right now after the confirmation on guidance. Due to the bullish technicals, great near-term earnings growth potential, and great long-term earnings growth potential, I'm going to be pulling the trigger on a small batch 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.

Additional disclosure: I'm long LL in my growth portfolio, not the dividend portfolio.