Why Home Depot Inc (HD) Stock Is Perfect for Income Investors

Advertisement

HD stock - Why Home Depot Inc (HD) Stock Is Perfect for Income Investors

Source: Mike Mozart via Flickr (Modified)

Since Home Depot Inc (NYSE:HD) “crushed” earnings estimates on Feb. 21, you would think the HD stock price would be rocketing upward, right?

Why Home Depot Inc (HD) Stock Is Perfect for Income Investors

Wrong.

Home Depot stock starts Mar. 7 lower than it did immediately after reporting those results: Net earnings of $1.74 billion — $1.44 per share — on revenue of $22.21 billion, a 5.8% year-over-year sales increase. This handily beat estimates of $1.35 per share in earnings. 

The company also set a $15 billion HD stock repurchase plan and hiked the dividend from 69 cents per share to 89 cents.

The market’s reaction? Mostly yawns.

You can argue that the reason for that is market anticipation of a good report. Home Depot stock is up 9.7% for the year, and 17% over the last 12 months.

But I think something else is going on with HD stock … I think the nature of the company’s investment case is changing.

HD Stock: From Capital Gains to Yield

The company was founded in 1978, around the time of Apple Inc. (NASDAQ:AAPL), and since coming public in 1981 it has had an Apple-like trajectory. Home Depot stock has split nine times in those 36 years, and a dollar invested at the IPO is now worth over $420,000.

This is why co-founder Bernie Marcus could build his hometown of Atlanta a giant aquarium and still be worth $4.1 billion, while his partner, Arthur Blank, could buy the Atlanta Falcons and be worth $3.4 billion. The company has about 2,200 stores and dominates its market.

But there is a natural limit to the middle of the home improvement market, as there isn’t (yet) in the device-and-cloud business. With fiscal 2017 sales of over $94 billion, Home Depot is bumping up against those limits. Growth has slowed to a steady $5 to $6 billion in sales each year, net income is level at about 8% of sales.

The company’s board has been doing the wise and natural thing: They’re sharing the wealth with shareholders. The dividend was 29 cents per share five years ago, and will now be 89 cents when it is paid out later this month. That’s a huge increase, and income investors who bought HD stock in 2012 at about $48 per share are now earning $3.56 per share on that money.

Don’t let the current yield of 2.42%, based on the Home Depot stock price of $147, fool you. This is a yield play — not a growth play — for the future.

HD’s Changing Performance

Yield investors are not like growth investors.

When you are looking for income, an income investor won’t watch the daily averages the way a growth investor would. So long as the dividend is rising, or just staying level, an income investor will hang on until death or taxes.

One result is that yield plays tend to be less volatile stocks than growth plays, and the volatility becomes more predictable and more seasonal.

This can be seen in stories about Home Depot options. Options can deliver big returns on tiny changes in a stock’s price, and a regular pattern helps.

The pattern for HD stock indicates that some backing-and-filling is due following earnings, and that’s precisely what is happening. The recent price action, in other words, is predictable.

Bottom Line on Home Depot Stock

Does this mean HD stock is no longer a great stock? For a growth investor, as I have been, there are better investments, and I sold out my position a few months ago, at a fat profit.

On the other hand, if you are an income investor and if you’re retired and need to make money on your money to live out your days in comfort, then Home Depot stock is a great investment for you. As is often said in Atlanta, that 2.42% yield is going to rise-up over time, as the company continues to share its profits with you.

Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud , available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this article.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2017/03/home-depot-inc-hd-stock-perfect-income-investors/.

©2024 InvestorPlace Media, LLC