Home Depot’s (NYSE:HD) soft guidance for Fiscal 2023 left investors feeling somewhat disappointed, as they had hoped for a more optimistic outlook. However, with shares still trading considerably lower from their all-time high levels and the most recent double-digit dividend increase boosting the stock’s yield, Home Depot’s investment case as a dividend growth pick now appears rather compelling. I am bullish on the stock.
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In this article, I will discuss the following:
- Home Depot’s most recent results and guidance
- Assess the company’s dividend-growth prospects
- Examine whether shares offer a compelling investment opportunity
Q4 Results: Resilient Despite Macroeconomic Headwinds
Due to an unfavorable macroeconomic environment and consumers being reserved in their spending, Home Depot’s Q4 results came in mixed, with revenue growth lagging. Despite this, I am not as disappointed as the rest of the market since the company’s core operations remained strong, and profits even increased year-over-year. This is particularly impressive, considering the ongoing challenges. Let’s talk numbers!
Sales, Sales, Sales…
In the fourth quarter of Fiscal 2022, Home Depot recorded total sales of $35.8 billion, up 0.3% year-over-year, with incremental sales from new locations offset by a comparable sales decline of 0.3% in existing locations. Lower comparable growth was driven by a 6% decrease in comparable transactions, which was, in turn, offset by a 5.8% increase in the average ticket.
What we see here is basic economics. With the company’s response to inflation, the average ticket price rose, which inevitably led to a decrease in demand. Yet, what’s fascinating is how smoothly customers accepted these price hikes, showcasing the relatively inelastic nature of Home Depot’s products.
Sustained Profitability
I found it particularly pleasing to see that the company managed to retain elevated profitability levels as well, despite inflationary pressures negatively affecting its industry peers. While interest and other expenses for the fourth quarter increased by $85 million to $408 million, primarily driven by higher long-term debt levels than one year ago, Home Depot managed to increase its gross margins by seven basis points to about 33.3%. It’s a minimal increase but a welcome one in the current market landscape, nonetheless.
As a result, the operating margin came in at 13.3%, negligibly lower than last year’s 13.5%, and net income was relatively flat year-over-year. Now combine that with a lower share count following Home Depot’s share repurchases over the past year, and earnings per share landed at $3.31, up 2.5% compared to Q4 2021. It’s hard not to be delighted with growing earnings per share from a retailer in the current environment.
What About Guidance?
What really disappointed investors wasn’t Home Depot’s Q4 results, which were robust given the circumstances. Instead, it was the company’s forward-looking guidance. In particular, management sees three key drivers for this year’s results:
- Firstly, management has assumed, like many economists, that real economic growth and consumer spending will be flat.
- Secondly, management believes that the ongoing shift in consumer spending from goods to services will persist, which may negatively affect the home improvement market.
- Finally, as an offset to these pressures, the company plans to continue to capture market share.
Based on these factors, Home Depot expects its earnings per share to decline by a mid-single-digit percentage. That said, due to Home Depot’s tendency to provide conservative guidance, it’s quite likely that we will essentially see flat earnings per share.
Again, I find this to be a pleasing result given the current circumstances – especially in the context that earnings per share have grown by a compound annual growth rate of 18% over the past five years.
Why Home Depot is an Attractive Dividend-Growth Pick
Regardless of the company’s most recent results and guidance, I find Home Depot’s investment case as a dividend-growth pick to have become quite compelling. Along with its Q4 earnings release, the company announced a 10% increase to its dividend to a quarterly rate of $2.09. This marked Home Depot’s 14th annual consecutive dividend increase.
Most importantly, however, with shares still trading about 30% lower from their all-time highs, Home Depot now offers an above-average yield. Specifically, excluding the brief period during the massive sell-off in 2020, Home Depot’s current dividend yield of 2.8% is the highest yield the stock has traded with since 2019.
Combined with the possibility of double-digit dividend growth being retained (which the company can easily afford since its payout ratio stands just under 50%), you can see why Home Depot is likely going to serve dividend-growth investors well, moving forward.
Is HD Stock a Buy, According to Analysts?
Turning to Wall Street, Home Depot has a Moderate Buy consensus rating based on 14 Buys, nine Holds, and one Sell assigned in the past three months. At $333.29, the average Home Depot stock forecast implies 11.9% upside potential.
The Takeaway
Home Depot’s Q4 results demonstrated great resilience despite the ongoing macroeconomic turmoil. Still, management’s guidance disappointed investors. However, given the circumstances, as well as the tough comparison to a multi-year earnings-per-share growth surge, Fiscal 2023 results should not be as bad as many seem to believe.
In the meantime, the stock appears to offer a compelling dividend-growth case. Shares are currently attached to an above-average yield, the dividend is growing in the double-digits, and the payout ratio remains below 50%. Hence, Home Depot is likely to serve income-oriented investors satisfactorily from here.
