Home Depot: A Great Value for Dividend Investors

I have recently moved to a new city and into a new house, which has prompted me to spend a lot of time (and money), at Home Depot (HD). As I was standing in the checkout line, I wondered if I could make money off of myself, and all of the other Do-It-Yourselfers in the lineup.

With that in mind, let’s take a quick look at Home Depot as a dividend stock investment.

Standard & Poor’s slashed Home Depot’s debt rating by three notches on Thursday, because they expect credit quality to weaken as the company uses cash to buy back shares, and pay dividends.

Increasing Stock Buybacks

Last month Home Depot said it planned to increase its stock buyback program by $22.5 billion, paying for the purchases with about $12 billion in new debt, cash on hand, and proceeds from the sale of its supply division.

Dividend History

Paying for stock buybacks with debt is a dangerous game, but Home Depot still maintains a solid record of increasing dividends that has seen the dividend triple over just the past three years!

With a dividend yield of 2.26%, which is higher than the industry average, and a paltry 28.25 dividend payout ratio, Home Depot makes a great case for a dividend growth stock.

In a statement, S & P said, Despite still-sizable free cash flow generation, given management’s new financial policy, we expect most or all of free cash flow will be used to repurchase shares and pay dividends.

Home Depot News

S&P cut Home Depot’s corporate credit rating by three notches to “BBB-plus,” the third-lowest investment grade, from “A-plus.” The outlook is listed as stable, which means that another downgrade is not expected over the next two years.

It is interesting to note that shares of Home Depot rose 1.6% on this news. This indicates that investors in the common shares expect to benefit from the increased dividends and stock buybacks. Home Depot is actively creating shareholder value for the dividend investor.

HD 1-yr chart:

Disclosure: The author does not own shares in Home Depot.

Comments

[Jim Glazen:]

Nardelli destroyed Home Depot and it will probably never be the same. The stores look like a disorganized heap of crap and the employees look like zombies. I'm sure the founders of the company are devastated to see what's happened to the company.

I wouldn't buy this stock until I see store level improvement. I was in a store recently and it looked business as usual to me. Indifferent employees and a complete mess.

2007 Jul 08 01:01 AM

[jeff savournin:]

Until the "store management teams" change there attitiudes towards their employees the stores will continue to offer poor customer service. The paperwork required from management to the home office forces them to spend a majority of their time in offices unstead of "managing" the floor. Since Nardelli left I have not seen any changes.

2007 Jul 08 09:08 AM