This article is about Home Depot (HD) and why it's a good buy for the total return and dividend growth investor.
Home Depot is now a trim position at 8.5% in The Good Business Portfolio and it's time to trim to keep diversified but I will wait until the next earnings are out in mid May. HD products cover the full line of home products, if they don't have it you don't need it. Home Depot is being reviewed using The Good Business Portfolio guidelines. Fundamentals of Home Depot will be reviewed in the following topics below The Good Business Portfolio Guidelines, Total Return and Yearly Dividend, Last Quarter's Earnings, Company Business and Takeaways And Recent Portfolio Changes.
I use a set of guidelines that I codified over the last few years to review the companies in The Good Business Portfolio (my portfolio) and other companies that I am taking a look at. For a complete set of the guidelines, please see my article "The Good Business Portfolio: Update To Guidelines and July 2016 Performance Review". These guidelines provide me with a balanced portfolio of income, defensive, total return and growing companies that hopefully keeps me ahead of the Dow average.
Good Business Portfolio Guidelines.
Home Depot passes 11 of 11 Good Business Portfolio Guidelines. These guidelines are only used to filter companies to be considered in the portfolio. Some of the points brought out by the guidelines are shown below.
Home Depot has a dividend yield of 2.3% which is above average for the market. The dividend has been increased for 10 of the last 10 years meeting the dividend guideline and the dividend is very safe. Home Depot is therefore a fair choice for the dividend growth income investor and total return investor. The average 5 year payout ratio is good at 41% over the past five years. After paying the dividend this leaves plenty of cash remaining for investment in expanding the business worldwide, buying bolt on companies, increasing the dividend and buying back stock.
Home Depot is a large-cap company with a capitalization of $202.8 Billion. The large size of Home Depot gives it the muscle, plus its cash flow to increase the business going forward. Home Depot 2017 projected total yearly cash flow at $9 Billion is strong allowing the company to have the means for company growth, increased dividends and buy back of stock.
I also require the CAGR going forward to be able to cover my yearly expenses. My dividends provide 3.2% of the portfolio as income and I need 1.9% more for a yearly distribution of 5.1%. The three-year forward CAGR of 15% (S&P Capital IQ) is well above my guideline requirement. This good future growth for Home Depot can continue its uptrend benefiting from the continued growth of housing market.
Looking back five years $10,000 invested five years ago would now be worth over $33,400 today. This makes Home Depot a very good investment for the total return investor looking back, that has future growth as the housing sector continues to grow.
Home Depot S&P Capital IQ rating is four stars or buy with a target price of $154.0. Home Depot price is presently 2% above the target. HD is a fair buy at the present price for the investor who wants above average total return and growing steady income and is also a long term investor since HD is almost always pricey.
One of my guidelines is would you buy the whole company if you could, the answer is yes. The Good Business Portfolio likes to embrace all kinds of investment styles but concentrates on buying businesses that can be understood, makes a fair profit, invests profits back into the business and also generates a fair income stream. Most of all what makes HD interesting is the increasing the growing foreign markets and housing sector with the hope of reduced corporate taxes.
Total Return And Yearly Dividend
The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of the Good Business Portfolio. Home Depot strongly beat the Dow baseline in my 52 month test compared to the Dow average. I chose the 52 month test period (starting January 1, 2013 and ending to date) because it includes the great year of 2013, and other years that had fair and bad performance. The great total return of 159.41% makes Home Depot a good investment for the total return investor that also wants a steady increasing income. HD has an above average dividend yield of 2.3% and has had increases for the past 10 years with the last increase going from $0.69/Qtr. to $0.89/Qtr. or a 30% increase.
DOW's 52 month total return baseline is 60.31%
52 Month total return
Difference from DOW baseline
Yearly Dividend percentage
As seen in the 5 year price chart below Home Depot does have a good chart going up and to the right in a steady slope better than the market. In 2013 HD had a great year when the market was up 27%, HD came in at a 33% increase.
Last Quarter's Earnings
For the last quarter on February 21 ,2017 Home Depot reported earnings that beat expected by $0.11 at $1.44 and compared to last year at $1.17. Total revenue was higher at $22.2 Billion more than a year ago by 5.8% year over year and beat expected by $410 Million. This was a great report with bottom line beating expected and top line increasing. The next earnings report will be out in late May 2017 and is expected to be $1.60 compared to last year at $1.44.
Projections from this earnings release shown below continue the growth story for Home Depot.
Fiscal 2017 Guidance
The Company provided the following guidance for fiscal 2017:
- Sales growth of approximately 4.6 percent
- Comparable store sales growth of approximately 4.6 percent
- Six new stores
- Gross margin decrease of approximately 15 basis points
- Operating margin expansion of approximately 30 basis points
- Tax rate of approximately 36.3 percent
- Share repurchases of approximately $5.0 billion
- Diluted earnings-per-share growth after anticipated share repurchases of approximately 10.5 percent, or $7.13
- Capital spending of approximately $2.0 billion
- Depreciation and amortization expense of approximately $2.0 billion
- Cash flow from the business of approximately $11.3 billion"
Home Depot is one of the largest home improvement retailer, which supports the growing housing sector.
As per Reuters The Home Depot is a home improvement retailer. The Company sells an assortment of building materials, home improvement products, and lawn and garden products, and provides various services. The Home Depot stores serves three primary customer groups: do-it-yourself (DIY) customers, do-it-for-me (DIFM) customers and professional customers. Its DIY customers are home owners purchasing products and completing their own projects and installations. The Company assists these customers with specific product and installation questions both in its stores and through online resources and other media designed to provide product and project knowledge. Its DIFM customers are home owners purchasing materials themselves and hiring third parties to complete the project or installation. Professional Customers are primarily professional renovators/remodelers, general contractors, repairmen, installers, small business owners and tradesmen. "
Home Depot has everything you could want for home repair and upgrade, if they don't have it you don't need it.
Source : Home Depot
Over all Home Depot is a good business with 15% CAGR projected growth as the demand for home remodeling and the housing sector continues to grow. The good cash flow provides HD the capability to continue its growth by increasing revenue as they buy bolt on companies, increase dividends and buy back shares.
Also as a tail wind we have President Trump wanting to lower corporate taxes on foreign income. As the corporation tax rate is lowered earnings of Home Depot business income should increase.
The economy is showing moderate economic (about 2.1%) growth right now and the FED has raised rates in March 2017 with future rate increases dependent on the United States economy. The FED projects for 1-2 more increases in 2017. I feel when it does raise rates it will be less, maybe just one more, they don't want to trigger a slowdown in the economy.
From the February 21, 2017 earnings call Craig A. Menear (Chief Executive Officer and Chairman) said
Fiscal 2016 was a record year for our business, as we achieved the highest sales and net earnings in company history. Fiscal 2016 sales grew $6.1 billion to $94.6 billion, an increase of 6.9% from fiscal 2015, while diluted earnings per share grew 18.1% to $6.45. Sales for the fourth quarter were $22.2 billion, up 5.8% from last year. Comp sales were up 5.8% from last year, and our U.S. stores had positive comps of 6.3%. Diluted earnings per share were $1.44 in the fourth quarter.
We continue to see broad-based growth across the store and our geographies. All three of our U.S. divisions posted positive comps in the fourth quarter, as did all 19 U.S. regions and top 40 markets. Internationally, both our Mexican and Canadian businesses posted positive comps in local currency for the quarter, making it 53 and 21 quarters in a row of positive comps, respectively.
Our merchants and store teams did an outstanding job delivering value and service for our customers across multiple events throughout the quarter, both in stores and online."
This shows the feelings of management to continued growth of the Home Depot business and shareholder return.
Takeaways and Recent Portfolio Changes
Home Depot is an investment choice for the total return investor with its above average great total return over my test period and a good choice for the dividend growth investor. Home Depot is 8.5% of The Good Business Portfolio and will be trimmed after the next earnings report which I expect to be great. If you want a growing total return and good growing income HD may be the right investment for you if you are a long term investor, I don't know when HD will ever not be pricey.
Added to position of Texas Instruments now at 4.3% of the portfolio a full position. S&P recently raised TXN target price to $84 from $77.
Started a position (position number 25, portfolio now full) in American Tower (AMT) a specialty REIT at 0.4% of the portfolio. Their earnings just can out and were great, beating expected by $0.13 and with revenue increasing 21.3% year over year.
Increased position of Omega Healthcare Investors (OHI) to 5.84% of the portfolio. I wanted a little more income.
Trimmed Boeing (BA) from 10% of the portfolio to 9.6%. Great Company but you have to be diversified.
Trimmed Harley Davidson (HOG) to 3.2% of the portfolio. Growth looks likely to be negative again this year. S&P raised HOG target to $60 but sales look slow for a while.
Added to position of Digital Reality Trust (DLR) now at 1.3% of the portfolio. I feel the computer industry facilities business has nowhere to go but up and DLR pays an above average 4% dividend. I wrote an article on Digital Reality Trust this year if you are interested. This is another specialty REIT in a growing sector.
The Good Business Portfolio generally trims a position when it gets above 8% of the portfolio. The four top positions in The Good Business Portfolio are, Johnson and Johnson (JNJ) is 8.0% of the portfolio, Altria Group (MO) is 7.8% of the portfolio, Home Depot (HD) is 8.5% of portfolio and Boeing is 9.6% of the portfolio, therefore BA, JNJ and home Depot are now in trim position with Altria getting close.
Boeing is going to be pressed to 10% of the portfolio because of it being cash positive on 787 deferred plane costs at $316 Million in the first quarter, a increase from the fourth quarter. The first quarter earnings were good with Boeing beating the estimate by $0.07 at $2.01. S&P Capital IQ also raised its one year target to $210.
JNJ will be pressed to 9% of the portfolio because it's so defensive in this post BREXIT world. Earnings in the last quarter beat on the top and bottom line but Mr. Market did not like growth going forward. JNJ is not a trading stock but a hold forever, it is now a strong buy as the healthcare sector is under pressure.
For the total Good Business Portfolio please see my article on The Good Business Portfolio: 2016 third-Quarter Earnings and Performance Review for the complete portfolio list and performance. Become a real time follower and you will get each quarters performance after the earnings season is over in a few weeks.
I have written individual articles on CAB, JNJ, EOS, GE, IR, MO, BA, PEP, AMT, Omega Health Investors, Home Depot (TXN), Digital Investors Trust (DLR) and Home Depot (HD) that are in The Good Business Portfolio and other companies being evaluated by the portfolio. If you have an interest please look for them in my list of previous articles.
Of course this is not a recommendation to buy or sell and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account and the opinions on the companies are my own.
Disclosure: I am/we are long BA, JNJ, HD, MO, DLR, AMT, HOG, PEP, OHI, TXN,.
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.