The housing market continues its post-subprime mortgage crisis recovery, and many of those new homeowners are choosing Home Depot Inc (HD) when they need a hammer, a ladder or a mower. As a result, investors have been snatching up HD stock of late.
Housing starts have more than doubled since their depths of the Great Recession, while existing home sales have increased by more than 50% since 2010.
Home improvement has followed suit. After slipping in 2008, 2009 and 2010, Home Depot’s sales have increased every year since, and remained steadily in the 5% to 6% range each of the past four years.
The company’s profits are even better, with double-digit EPS growth every year since 2009. Home Depot isn’t expecting business to slow anytime soon: Sales are expected to top $100 billion by 2018, up from $88 billion last year.
Three Catalysts for HD Stock
But sales and earnings growth are nothing new for Home Depot. Even though it has already risen nearly 20% in the last year and 75% in the past two years, they’re not the reasons to buy HD.
To me, there are three things that should keep the rally in Home Depot stock going over the next 12 to 24 months.
- Improving E-Commerce Business: For too long, Home Depot relied strictly on sales at its brick-and-mortar stores. Finally, the company is emerging from the dark ages. By upgrading its website and expanding its mobile offerings, Home Depot’s e-commerce business is flourishing; the company’s online sales grew by nearly $1 billion in 2015, or 26%, to $4.7 billion from $3.74 billion in 2014. Web sales accounted for 5.9% of Home Depot’s total sales last year, up from 4.5% in 2014. There’s plenty of room to expand: only 108 of HD’s 1,900 U.S. stores currently offers the buy-online, deliver-to-your-home option.
- A Fast-Growing Dividend: The dividend has never really been a big reason why people invest in HD stock. Even today, HD yields a modest 2% — lower than all but six of the 30 companies that compose the Dow Jones Industrial Average. But in recent years, the company has become far more generous with its cash. After barely budging from 2006 to 2011, HD’s dividend has nearly tripled in the last five years. HD has hiked its quarterly payout in each of the last four years, by an average of 24%. The latest dividend bump came in March, to 69 cents per share from 59 cents previously. Despite all the increases, Home Depot’s payout ratio is still just 44.5%, in line with where it was four years ago and well below its 57% payout ratio five years ago. With $2.2 billion in cash — up from $1.7 billion a year ago — HD has both the money and growth to keep the double-digit dividend hikes coming the next few years.
- $18 Billion in Buybacks: Another way HD stock is rewarding shareholders is through its massive share repurchase program. The company plans to buy back $10 billion of its own shares this year alone as part of its ongoing $18 billion repurchase program, which won’t end until late 2017. Since launching the buybacks last year, Home Depot stock has advanced 22% at a time when the Dow has been essentially flat.
On top of those three promising potential catalysts, HD stock trades at a very reasonable 19 times next year’s earnings estimates. When you consider that Home Depot’s earnings are expected to increase 15% this year and 13.5% next year, that’s a pretty fair valuation.
Home Depot Stock Due for Another Breakout
HD stock looks good from a purely technical standpoint too. HD burst above its 50-day moving average in late February and hasn’t dipped below it since. Operating in a tight range between $133 and $137 since March, the stock is due for a breakout.
If the company beats earnings expectations when it reports first-quarter results next Thursday, May 17 — as it has in each of the last two quarters—it’s a good bet the breakout will be to the high side.
You can either buy after those results are released or take a flyer now while HD is trading at the low end of its six-week range. Regardless, if you’re investing for the short or long haul, HD stock is a buy.
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.
