Home Depot Stock Isn’t Exciting – But That Can Be a Good Thing

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HD stock - Home Depot Stock Isn’t Exciting – But That Can Be a Good Thing

Source: Mike Mozart via Flickr (Modified)

Do-it-yourself retailer Home Depot (NYSE:HD) has had an impressive month. HD stock dipped down to $185 per share at the end of May, but has since recovered to trade at $200 per share. Investors initially lost confidence in the home improvement chain after its most recent earnings report turned out weaker than expected figures. However, HD has proven itself to be resilient and reliable, and the firm’s size and dividend payments make it a good blend of income and growth that will round out just about any portfolio.

Challenges for HD Stock

Of course, Home Depot isn’t risk-free. The company’s success is closely tied to the U.S. economy — and more specifically the housing market. Another housing crash would wreak havoc on the company’s strategy and most likely take HD stock lower. However, the company has proven in the past that it can withstand economic weakness and has been able to hold its ground in the retail space as e-commerce shook up the industry. Management has been working on new projects that will give the firm a stronger position in the e-commerce space and help mitigate losses during an economic downturn. 

Home Depot is the clear leader in the home improvement space with a $216 billion market cap, which could put investors off for several reasons. First, HD shares trade at a premium compared to competitors because the firm’s size and dominance offer an added layer of security. While that premium is deserved, it’s worth noting that a company of that size simply doesn’t have the ability to grow as much or as quickly as a smaller, riskier peer. Second, bad news hits HD stock hard — perhaps harder than some of its peers because expectations are higher.

That’s what happened in the most recent quarter — although sales, earnings and revenue were all up, they didn’t meet analysts’ expectations and therefore took the stock markedly lower as investors worried about whether the figures represented long-term problems.

The Upside

As Louis Navellier point out, analysts’ worries about the missed projections could be overdone. A late spring season in the U.S. slowed down HD’s garden sales, which tend to have a sizable impact on the company’s bottom line this time of year. Navellier highlighted same-store sales to illustrate this point — the first-quarter comps were up 4.2% which analysts grumbled about. However if you exclude home and garden sales, same store sales rose 6.5%, which indicates that the trouble could have been largely associated with the seasonal challenges.

Furthermore, seeing comps rise 4.2%, despite the loss of big-ticket sales like lawn mowers and garden products isn’t such a bad thing in the retail space. That’s another reason to like HD stock — the company is dependable. 

Home Depot management is clear about its revenue projections at the end of each year and those figures are pretty reliable. This year, the firm is expecting to see revenue growth of between 4.5% and 6% with margins making their way toward 15%. By 2020, HD is seen generating $120 billion in sales. If the firm is able to meet those targets, it’s not unreasonable to expect to see earnings growth of between 15% and 20% per year over the next three years.

HD Stock Dividends 

As I mentioned earlier, one of the big reasons HD stock is such a valuable addition to your portfolio is the fact that it blends a respectable growth rate with reliable dividend payments. Home Depot has raised its dividend consistently for the past six years and there’s no reason to expect that to end. Right now the stock offers a dividend payment of 2.07%, and its payout ratio of 45.75% suggests there’s plenty of room to continue raising those payments.

The Bottom Line on HD Stock

HD stock isn’t an exciting pick — but it’s a solid one. The company carries a degree of risk because it operates in a competitive and turbulent industry. But management has a track record of making good decisions that kept the firm moving forward steadily even in choppy conditions.

Although Home Depot’s size will restrict its growth in the future, it’s safe to assume than the next three years will deliver investors respectable earnings growth alongside growing dividend payments. If you’re looking for a retailer to round out your portfolio, HD stock is definitely worth considering. 

As of this writing, Laura Hoy did not hold a position in any of the aforementioned stocks. 

Marie Brodbeck has a Finance degree from Duquesne University and has been a financial journalist for more than a decade. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN.


Article printed from InvestorPlace Media, https://investorplace.com/2018/06/home-depot-hd-stock-isnt-exciting-that-can-be-good-thing/.

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