Home Depot Promises Yearly Dividend Increases and Targets 40% Payout Ratio

Includes: HD, LOW
by: The Dividend Pig

Home Depot (NYSE: HD) has made no secret of its dividend intentions. According to yesterday's released 4th quarter and FY 2010 results,

"As a testament to our confidence in the Company's strategic initiatives and our commitment to returning capital to our shareholders, the board increased the dividend for the second consecutive year," said Blake. "It is our intent to increase our dividend every year. Our longer-term targeted dividend payout ratio is 40 percent."

2010 was a good year for Home Depot, the world's largest home improvement store. Comparable store sales were up 4.8% this year, and total sales were up 2.8% to 68 billion. This is the first year of positive sales growth since 2006.

As of 2010's unaudited numbers, the payout ratio was 47%, which is very close to their proposed goal. Free cash flow of 3.5 billion is more than enough to cover the 1.6 billion they paid this year in dividends, but it is a 16.1% decrease from last year's 4.2 billion.

The balance sheet remained healthy, with a current ratio of 1.33 and a total debt to equity of 52%.

Home Depot has plenty of big plans for the future. 2011 guidance suggests sales growth of 2.5%, and diluted earnings per share to increase 9.5% to approximately $2.20. This number may be a bit conservative, since HD also has 2.5 billion worth of share buybacks planned this year.

The current price of $38.09 carries a yield of 2.6% based on the new dividend rate, effective March 24. Compare this to Lowe's (NYSE:LOW), which sells at $25.99 and yields 1.7% based on the current quarterly dividend of 11 cents.

Two years of dividend increases is not quite as impressive as Lowe's 48, but a journey of a thousand miles begins with a single step. Or so I've heard.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.