Home Depot Continues to Impress on Dividends

After the market closed on May 22, 2008, Home Depot (HD) announced that its board of directors declared a first quarter cash dividend of 22.5 cents per share. The dividend is payable on June 19 to shareholders of record on the close of business on June 5.

This extends the string of flat dividends to seven dating back to the November 2006 dividend. Since 2004, HD has raised its dividend in the month of November (except November 2007). The flat dividend this quarter did not surprise me. I also expect the August 2008 dividend to remain flat at 22.5 cents. This is where it gets interesting.

The way HD has timed its dividend increases, it showed a year-over-year [YOY] increase for calendar year 2007. Even after eight flat dividends, HD can still end up with a YOY increase from 2007 to 2008 with an increase in November 2008. Management knows this.

Though not as bad as a dividend cut, a flat dividend is a close second. From a perception standpoint, a YOY flat dividend will not bode well with the dividend investing contingent of HD's shareholders. HD's 3.34% yield is good, but not good enough for most dividend investors to swallow a flat YOY dividend. The 3.34% yield is misleading since a large portion of it came through HD's share price decline. For example, my yield-on-cost (annual dividend $/cost basis) is 2.49%, significantly lower than the current yield.

Beyond the broader problem of declining residential construction, HD continues to battle with customer service issues. Home Depot Chief Executive Frank Blake was grilled by several shareholders at the company's annual meeting about substandard customer service experiences in HD stores.

As noted in my "State of the Dividend Address", I currently have HD "On The Shelf." This means I am taking a wait and see approach and not adding to my position. If HD does not increase its dividend over the next two quarters, I will reevaluate to determine if it belongs in my dividend income portfolio.

At the time of this writing, I owned shares of HD (2.0% of my income portfolio).

Comments

[Paul Price:]

Increasing HD's dividend when the EPS are declining would be a sign of management stupidity.

You should like the shares less if that occurs this year, not more.

2008 May 27 01:17 PM

[Football Geek:]

Maybe if HD did'nt spend all that money on share buy backs then
they could increase their dividend yearly. They have raised it
different times of the year in the past. I would be happy if
they would keep to the same month every yearly increase. They
treat their shareowners the same as their customers, always
guessing.

2008 May 27 09:19 PM

[marketwatchr:]

What they need to do is increase customer service this will increase profits...then they can increase the dividend and the share price will increase as well....is this too simple?
FD:Long time owner of HD

2008 May 27 10:25 PM

[The Real Ex...:]

There is absolutely no justification for a dividend increase, other than to keep investors in the stock - a stock that is dying. HD continues to be in trouble. It has lost much of its customer base due to many years of terrible service and now it faces the effects of the correction in the largest real estate bubble in US history.

I won't blame you for the title "HD Continues to Impress on Dividends" as most likely the editors made this stupid title up. They usually alter author titles to create buzz and are irresponsible in this regard. This behavior as well as the selective censorship they practice is why I no longer submit articles to Seeking Alpha.

If you think that the dividend increase is impressive then you have not considered the lack of real basis for the increase. If you stay in this stock or buy it, it will be wasted money.

If you are looking for dividends with limited downside, go to the pharmas. HD has a lot of downside while the pharmas have for the most part bottomed out. Plus the real estate correction will last many years while Medicare Part D is just now starting to kick in, promising some help to pharmas.

2008 May 28 01:33 AM

[sonny35:]

IF HD WOUJD GO BACK TO IT's original procedur of reiceving and go back to overnight pack down it would increase it's customer service which has been hurt.

2008 Jul 08 12:14 PM