Home Depot (NYSE:HD) earnings beat analyst estimates, sending the stock up in pre-market trade Aug. 20.
Investors even ignored warnings from management about trouble ahead.
The home improvement retailer earned $3.479 billion, $3.17 per fully diluted share, on revenue of $30.839 billion, for the quarter ending in July.
This beat estimates of $3.12 per share of earnings but missed estimates of $31.1 billion in sales. The company also trimmed its outlook for the full year, based on worries about tariffs.
Come for the Dividend
This didn’t stop the party. Even at its expected opening price of $213 per share on Aug. 20, Home Depot’s dividend of $1.36 per share still yields 2.5%, and it’s fully supported by earnings.
With a government 30-year bond yielding 2.05%, that’s a bargain for income investors. Especially since the dividend has nearly tripled over the last 5 years from 47 cents.
It means that if you got into Home Depot stock five years ago, when it was trading at $93 per share, you’re getting a yield of nearly 6% on that investment, along with capital gains of about 22% each year. That’s the very definition of a dividend aristocrat.
Home Depot has been such a good stock, for so long, that it now represents 5.5% of the Dow Jones Industrial Average, which it joined in 1999, replacing Sears.
Stay for the Growth
Since joining the Dow, Home Depot shares have resisted two sharp recessions. The company has even proven resistant to Amazon (NASDAQ:AMZN), making it a unique investment proposition.
Growth has accelerated in recent years, from a $6 billion gain in sales to an $8 billion gain pace. The company is now the fifth largest U.S.-based retail company, behind Walmart (NYSE:WMT), Amazon, Costco Wholesale (NASDAQ:COST) and Kroger (NYSE:KR).
The current interest rate environment could cause another jump in Home Depot’s price. Fundamentals are strong, growth looks sustainable and the dividend is high relative to other income instruments.
Home Depot bears were worried going into earnings over beating last year’s sales, the state of the home remodeling market, and the fact that earnings per share are constantly buoyed by stock repurchases. But these voices are being drowned out, as are those of management, which lowered its guidance for the year at its conference call.
Why the Pop?
Home Depot stock rose after earnings because it was making up for ground lost to the trade war and global growth fears. HD stock shed more than $10 during August, even crossing a technical sell signal.
While the company is known to skew male, it has recently been improving its home décor selection to appeal to women. The focus on textiles and furnishings can help in “staging” homes for re-sale, which also appeals to core customers.
While young homebuyers are acquiring older, smaller houses, Home Depot executives say they’re still interested in big projects as their home values rise. This should maintain the company’s sales momentum.
Home Depot Stock Is the Best Retail Buy Right Now
Home Depot is the best retail stock to own now. While Costco shares have matched its march upward over the last five years, Costco’s dividend yields less than 1%. Home Depot remains devoted to its dividend, it supports the stock with buybacks, and that dividend now yields more than a 30-year bond.
That’s why investors are ignoring warnings that the stock market is high, that Home Depot stock may be technically stretched, even management’s own concerns about the future. They’re buying with both hands because, in the current market, Home Depot is a genuine bargain.
Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental story, Bridget O’Flynn and the Bear, 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 shares in AMZN and KR stock.
