1 Rock-Solid Retail Stock to Buy and Hold

Uncover - Home Depot dividend stock

Author: Tim Phillips

November 18, 2020

Share this

Home Depot Inc (NYSE: HD) shares fell despite the home improvement retailer beating earnings expectations. Here’s why it’s a long-term buy and hold stock for any portfolio.

Tim’s Take:

Home Depot’s latest set of earnings were impressive. Yet the market didn’t view them that way. The big box retailer focuses on home improvement hardware and goods.

A lot of Home Depot’s clients are professional contractors who purchase construction products, tools and other services from the company’s massive stores.

However, Home Depot has also made a successful entry into the DIY space, with people who want to take on their own home improvement projects.

Home Depot reported a solid set of earnings yesterday, with third-quarter sales clocking in at US$33.5 billion. This was way ahead of the US$31.8 billion that analysts were looking for.

Omnichannel retail

Similarly, same-store sales blew past estimates of 17.2% as consumers’ spending helped push that number up to a healthy 24.1% during the period.

Meanwhile, earnings per share (EPS) was up a stonking 25.8% year-on-year to US$3.18 in the latest quarter.

Of course, there were increased costs to contend with. Cost of sales was up a similar amount to EPS – rising 24% year-on-year.

One reason it has thrived in the current environment is the fact it’s invested in its digital capabilities with services such as “curbside pickup”. This strength has been shown in its digital sales growth of 80% year-on-year (see below).

Home Depot earnings

Source: Home Depot Q3 2020 earnings infographic

Cleaning stores more regularly and providing protective equipment to front-line staff has obviously weighed on costs.

The rise in costs, though, I take as a positive. It shows the company’s leadership takes the pandemic, and its staff’s well-being seriously.

News that Home Depot would be spending up to US$1 billion to raise annual wages for front-line employees should also be seen as a longer-term positive for the company’s reputation.

Spending on the home

It’s easy to see why Home Depot has benefitted so much amid the lockdowns. It was deemed an “essential retailer” at the height of the virus surge in March and April so its stores stayed opened throughout the nationwide lockdowns in the US.

With more people now looking like they’re going to be back indoors for the long winter ahead, projects around the home are likely to be high on the agenda.

The upshot? People will be purchasing goods from Home Depot. Management stated as much; the company is seeing more transactions and higher ticket prices.

What this means is that people are buying more often but also, every time they do buy, they’re buying more in each transaction.

Acquisitions and dividends

Home Depot also recently announced an US$8 billion offer to buy HD Supply Holdings Inc (NASDAQ: HDS), an industrial supplies distributor it has actually previously spun off to private equity back in 2007.

The deal should give Home Depot extra earnings growth as it looks to solidify its position in the professionals market.

Finally, Home Depot has been an unbelievable dividend growth stock. Probably little known to investors, the company has actually grown its dividend every year since 2010.

Although Home Depot stock only yields 2.2%, it has grown its annual dividend per share from US$0.945 in 2010 to US$6 in 2020.

That’s equal to a compound annual growth rate (CAGR) of 20.3%. That’s impressive for a company the size of Home Depot.

It admittedly does not have the same Dividend Aristocrat status as its competitor Lowe’s Companies Inc (NYSE: LOW), which serves more DIY consumers of home improvement products.

Yet if long-term investors want a rock-solid retailer that will keep chugging along, while also paying out a growing dividend from its huge free cash flow, Home Depot could be a great option.

Disclaimer: ProsperUs Head of Content Tim Phillips owns shares of Home Depot Inc.

This material is categorised as non-independent for the purposes of CGS-CIMB Securities (Singapore) Pte. Ltd. and its affiliates (collectively “CGS-CIMB”) and therefore does not provide an impartial or objective assessment of the subject matter and does not constitute independent research. Consequently, this material has not been prepared in accordance with legal requirements designed to promote the independence of research. Therefore, this material is considered a marketing communication.

This material is general in nature and has been prepared for information purposes only. It is intended for circulation amongst CGS-CIMB’s clients generally and does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this material. The information and opinions in this material are not and should not be construed or considered as an offer, recommendation or solicitation to buy or sell the subject securities, derivative contracts, related investments or other financial instruments or any derivative instrument, or any rights pertaining thereto. CGS-CIMB have not, and will not accept any obligation to check or ensure the adequacy, accuracy, completeness, reliability or fairness of any information and opinion contained in this material. CGS-CIMB shall not be liable in any manner whatsoever for any consequences (including but not limited to any direct, indirect or consequential losses, loss of profits and damages) of any reliance thereon or usage thereof.

About the Author: Tim Phillips

Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth. He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. In his spare time, Tim enjoys running after his two year-old son, playing football and practicing yoga.