A dividend-growth investing strategy can be rewarding; buy and hold high-quality stocks that grow profits every year and share them with its investors. Home improvement retailer Home Depot (NYSE: HD) is certainly earning its dividend stripes — the company has raised its dividend annually for 13 consecutive years.
The housing market might be on shaky ground as mortgage rates keep rising, but that shouldn’t scare you away from Home Depot, which is poised to thrive regardless of what the housing market is doing. Here is why Home Depot will likely keep raising its payout and why it deserves a spot in any diversified dividend portfolio.
It’s proving to be a durable business
Home Depot is the leading home improvement retailer in the United States; it sells to both professional contractors and consumers, which makes it a sneaky way to get investment exposure to the broader housing market.
The company sells tools and materials to build and renovate homes, and business has been great over the past several years. Revenue growth has been up and down, especially with COVID-19. But it has averaged 10% annual increases over the past five years.
The business has also been resilient; you can see below that revenue growth only fell as far as negative 5% despite lockdowns virtually shutting down the economy in 2020. Today, the real estate market is cooling as mortgage rates crush buyer demand, but management is still guiding for 3% sales growth for 2022.
Go back to the great financial crisis of 2008 and 2009, which produced what many consider the worst housing bear market in history. You’ll see that revenue growth contracted to a negative 20%, but still not enough to keep Home Depot from generating positive free cash flow. In other words, the company was still generating cash profits. During those tough years, management froze the dividend, but shareholders still were paid.
The encouraging takeaway is that the company has shown it can perform through good and bad times. That’s a fundamental trait for a dividend stock because you will see up-and-down markets over a long holding period. Home Depot certainly seems to fit the bill.
Strong financials support the dividend
Having a steadily growing and reliably profitable business is one thing, but how management uses those profits is another crucial conversation. A dividend stock should reliably pay and raise its dividend but should do so responsibly; borrowing to pay it or having a payout ratio that’s too high is a recipe for disaster.
You can see below that Home Depot’s cash profits easily cover the payout. The dividend payout ratio stands at 68%. It’s been lower in recent years but still has plenty of breathing room in case the business stumbles. Investors have enjoyed robust dividend growth; the company has raised it by an average of 17% annually over the past five years. You might see that slow down to keep the payout ratio manageable, but high-single-digit dividend growth seems very achievable if Home Depot’s revenue keeps growing.
In a darker scenario in which Home Depot’s profits fall, the company has options to keep its dividend afloat. It has a strong balance sheet with a leverage ratio of just 1.4 times debt to EBITDA. Personally, I consider anything under 2.5 to be excellent, so the company’s solid financials should give investors some additional peace of mind.
Should you buy Home Depot today?
Home Depot is a beloved stock and typically doesn’t suffer large drawdowns. The stock’s 34% plunge from its highs is its second-largest in 10 years outside of the COVID-19 crash in 2020. The stock’s current price-to-earnings (P/E) ratio is 16.7, already a solid discount to its median P/E of 22 over the past decade.
It’s not likely that this company is going anywhere, and the market is offering investors a deal on a blue-chip stock that’s poised to keep paying and raising its dividend. A likely future Dividend Aristocrat, Home Depot should be on any dividend investor’s shopping list, especially if the stock price keeps falling in the months ahead.