For what’s left of the Great American Middle Class, home is where the money is. For what’s left of Great American Retailing, Home Depot (NYSE:HD) is where that money’s spent.
The Atlanta-based home improvement retailer scored another beat on earnings for the first quarter of its 2019 fiscal year, with net income of $2.5 billion, $2.27 per fully diluted share, and revenue of $26.4 billion, which beat expectations by 9 cents.
Reporting on the numbers was mixed, with some analysts negative because same-store sales improvements missed estimates, and others calling them solid, pointing to a doubling of revenue during the decade.
For long-term investors, the debate is just noise.
Home Depot Stock May Be the Stock of the Decade
Say what you want about Amazon (NASDAQ:AMZN), but for income investors Home Depot has been the stock of the decade.
The shares are up 581% since the decade began, but more importantly, so is the dividend. It rose from 22.4 cents to $1.36. If you bought Home Depot shares in 2010, when they about $31, your current yield is 17.5%. That’s $5.44 coming into your pocket every year on your $31 investment, in addition to a rich capital gain.
The stock’s current yield, 2.9%, is nothing to sneeze at either. It’s the equivalent of lending your money to the government for 20 years.
Many older investors may look strictly at yield, treating stock investments like bonds. That’s a mistake. You want a growing yield, a dividend that’s rising, because that’s where your future income will come from. Home Depot’s net income has been rising steadily, so its price-to-earnings ratio was still at a market-matching 19.6 as trading opened on May 21.
What About Tomorrow for HD Stock?
The risk in a stock like Home Depot, tied as it is to homebuilding and home improvement, is that a collapse of the housing sector will hit it hard. Home Depot shares didn’t pass their 1999 high until 2012. Then again, neither did those of Amazon.
The share price also got cut in half during the Great Recession, but Home Depot maintained its dividend during the period.
Home Depot is still subject to housing market changes, but not in the same way a home builder like Lennar (NYSE:LEN) might be. Housing starts are volatile, and even today’s strong market is only running at half its 2006 peak. But this means housing supplies are tight almost everywhere. Older consumers are over-housed, younger ones under-housed.
How that shakes out will decide what happens to Home Depot stock going forward. What I’ve seen are many older homes adding “carriage houses,” apartments over new garages, which they rent out to young people or on AirBnB.
The income allows older folks stay in their current homes even longer, since they can afford the help that keeps them there. They can also stay longer by inviting their kids and grandchildren in. That’s how my neighbors did it in the 1980s.
All this chopping-and-changing within existing housing can, along with luxury upgrades, keep the home improvement market humming even while housing starts decline. This, along with an omni-channel and contractor-friendly strategy, may be Home Depot’s secret to success.
The Bottom Line
Don’t confuse the home improvement cycle with the homebuilding cycle.
Home Depot is the master of the home improvement cycle, which has been turning every home into a castle for four decades. This is wealth that will be passed on to the next generation in some form, but which also requires constant investment to remain wealth.
Home Depot stock looks good for another decade.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new environmental story, Bridget O’Flynn and the Bear , available now at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.