Home Depot: Cash Is Key To Dividend Growth

| About: Home Depot, (HD)

Key data points suggest that the US housing market has rallied in recent weeks, a welcome sign for investors, borrowers who owe more than their home is worth and the eternally optimistic Lawrence Yun, chief economist for the National Association of Realtors (NAR).

Not only did sales of existing homes increase 10 percent from year-ago levels in July, but the NAR's seasonally adjusted index of pending home sales also climbed 12.4 percent over the same period, suggesting that this strength should continue into August.

Meanwhile, the S&P/Case-Shiller US National Home Price Index posted its first year-over-year gain in almost 24 months, inching up 1.2 percent in the second quarter. Single-family home prices last increased in the second quarter of 2010, when the impending expiration of an $8,000 tax credit for first-time homebuyers gave the residential housing market a temporary boost.

The housing market is now showing glimmers of recovery, positioning Home Depot (NYSE: HD) for greater growth ahead.

This Atlanta-based chain focuses on both do-it-yourself (DIY) and professional customers. Both categories got clobbered during the 2008-2009 recession, as consumers cut back on spending and the housing market fell into a severe slump.

Home Depot survived the downturn by shedding unprofitable lines and enhancing customer service. As a result, revenue and earnings have grown during each of the past several quarters on a year-over-year basis.

On August 14, Home Depot announced second-quarter 2012 results that beat consensus expectations. The company reported $1.01 in earnings per share (EPS), compared to the estimate of $0.98 in EPS, and revenue of $20.5 billion, compared to the estimate of $17.8 billion. EPS rose 17.4 percent, while revenue climbed 1.7 percent, compared to the same period last year.

For the second quarter, the company reported earnings of $1.5 billion, an increase of 12.4 percent from the year-ago quarter. Last quarter marked the third in a row of rising earnings.

During the past three years, Home Depot's comparable store sales have consistently beaten those of its chief competitor, Lowe's (NYSE: LOW), a clear indication that Home Depot is grabbing market share. The company confirmed that it expects fiscal 2012 revenue will be up about 4.6 percent from 2011.

Responding to complaints of indifferent service, Home Depot has made an all-out effort to improve the customer's experience on the store floor. It has beefed up training of floor supervisors and equipped them with electronic hand-held inventory devices.

In June, the company's management revealed plans to dish out 50 percent of earnings as dividends. With a stock that now yields about 2.2 percent, Home Depot has plenty of cash on hand to continue raising dividends in future quarters.

Since 2003, annual dividends on average have represented less than half of annual free cash flow, reflecting ample leeway for future dividend boosts. The company also reaffirmed its commitment to an aggressive stock buy-back program, with the repurchase of $1.4 billion in additional shares slated for the remainder of the year. Home Depot represents a compelling growth story in the current choppy recovery.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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