3 things to check before buying Home Depot, Inc. (NYSE: HD) for its dividend
This article first appeared on Simply Wall St New.
In the face of concerns about inflation, it’s no surprise that real estate is gaining so much attention. Being the dominant presence in the home improvement industry, The Home Depot, Inc. ( NYSE: HD ) is certainly benefiting from these trends.
With the latest earnings published and the ex-dividend date announced, we’ll take a look at its dividend trends over the past decade.
The Home Depot is a Georgia-based retailer focused on home improvement and maintenance. It operates 2,298 stores across North America, focusing on 2 key market segments: professionals and DIY customers.
The company reported strong second quarter results with improved earnings and revenues, although profit margins remained stable.
Second quarter 2021 results:
Revenue: US $ 41.1 billion (up 8.1% year-on-year).
Net income: US $ 4.81 billion (up 11% year-on-year).
Profit margin: 12% (online).
GAAP EPS: US $ 4.53 (beaten by US $ 0.11)
Over the past 3 years on average, earnings per share have increased by 15% per year, while the company’s stock price has increased by 18% per year.
However, missed comparable sales , with + 4.5% vs Consensus + 5.61%, and a gross margin down 80bp to 33.2%.
The stock slumped on earnings, with analysts citing comparable missed sales and concerns about profit margins. Still, Wells Fargo maintains buy rating , citing commodity prices and the Delta variant, the risks of seeing increased demand for home improvement.
Not to mention the onset of hurricane season.
A 2.0% return isn’t very exciting, but the long payment history suggests Home Depot has some staying power.
The company also returned around 1.9% of its market capitalization to shareholders on share buybacks during the past year.
Companies (usually) pay dividends on their profits. If a company pays more than it earns, the dividend may need to be reduced. Comparing dividend payments to a company’s after-tax net income is an easy way to check if a dividend is sustainable.
Home Depot paid out 44% of its profits as dividends during the twelve month period. has the possibility of increasing the dividend.
Another important check is whether the free cash flow generated is sufficient to pay the dividend. The company has paid out 59% of its free cash flow, which is not bad in itself but is starting to limit the amount of cash available at Home Depot. to meet other needs.
It is encouraging to see that the dividend is covered by both earnings and cash flow. This usually suggests that the dividend is sustainable, as long as profits don’t drop sharply.
Volatility and growth potential
The dividend has been stable over the past 10 years which is great. We think this might suggest some resilience for the company and its dividends. In the past 10 years, the first annual payment was US $ 0.9 in 2011, compared to US $ 6.6 last year. Dividends per share have increased by around 21% per year. on this time.
Dividends have grown quite rapidly and, even more impressive, they haven’t seen any noticeable decline during that time.
If dividend payments have been relatively reliable, it would also be good for earnings per share (EPS) to increase, as this is essential for maintaining the purchasing power of the dividend over the long term. Strong earnings per share (EPS) growth could encourage our interest in the company despite fluctuating dividends, which is why it’s great to see Home Depot increasing its earnings per share by 19% per year over the past five years.
A company paying less than a quarter of its profits in the form of dividends and increasing its profits by more than 10% per year, appears to be on the cusp of its growth phase. At the right price, this is an interesting opportunity.
The Holy Trinity of a good dividend opportunity is affordability, stability and prospects for growth.
Home Depot’s dividend payout ratios are within normal limits, although we note that its cash flow is not as strong as the income statement suggests.
That said, we were happy to see him increase his profits and pay a fairly consistent dividend. Overall, we think Home Depot performs well in our analysis. It’s not quite perfect, but we would certainly be keen to take a closer look.
Investors generally tend to favor companies with a consistent and stable dividend policy rather than those that operate irregularly. Still, there are a host of other factors that investors need to consider, aside from dividend payments, when analyzing a company. For example, we have chosen 1 warning sign for Home Depot that investors should be aware of before committing capital to this stock.
Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no positions in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents.