Home Depot Inc.: 3 Reasons to Be Bullish On HD Stock
January 20, 2017
HD Stock Continues to Reward Shareholders
Home Depot Inc. (NYSE:HD) stock is a company that investors should take seriously. Being quite a large company, there could be some aspects of the business that go unnoticed when researching the company. As an investor, it is very important to review the entire business and understand how the company has performed in the past. The future of the business also matters because, as an investor, it affects the future of your investment.
Let me explain three reasons why I am bullish on HD stock.
Strong Management
The easiest way to measure the performance of a company and its management team is by taking a look at the stock price performance. Over a five-year period, HD stock has seen an increase of 209%. This may seem like a great return in such a short time, but looks could be deceiving. As such, the sales of the business should be used to determine the reason for the increase.
The S&P 500 index is used as the bellwether to determine a company’s share price performance. According to the five-year chart for the S&P 500, it’s return has been 68%. Therefore, on a comparative basis, HD stock has outperformed the overall index. (Source: “Home Depot Inc.,” MarketWatch, last accessed January 19, 2017.)
The company financials provide evidence that bottom line growth is a priority. Sales have seen growth of 26% over the past five years, with increases in metrics such as sales per square foot, average ticket purchase, and the number of consumer transactions.
Returning Money to Shareholders
HD stock is currently trading at $136.16, which is offering a dividend yield of 2.03%.
As the sales have seen growth, so has the dividend that has been paid to shareholders. Over the past five years, the dividend has gone from $0.29 to $0.69 per share, which is an increase of 137%. The dividend is paid on a quarterly basis and reviewed every February. With sales on an upward trend, there is the possibility of seeing another dividend hike next month.
Another method that management has used to return money to shareholders has been the share repurchase program that has been put in place. There is currently an $11 billion share repurchase program in place and this is expected to be completed by next year in February. A benefit as a shareholder is that there is support to the share price by the continued purchasing of the shares by Home Depot’s management. Since management has allocated a capital amount to be repurchased, on a day down of HD stock more shares could be purchased. Therefore over the longer terms fewer shares will be outstanding. When looking at the valuation of HD stock the investment does look attractive. (Source: “The Home Depot Announces Record Fourth Quarter And Fiscal 2015 Results; Increases Quarterly Dividend By 17 Percent And Provides Fiscal 2016 Guidance,” Home Depot Inc, February 23, 2016.)
Fundamental Overview
A metric that comes in handy when comparing a company to its peers is the price-to-earnings (P/E) ratio. This ratio is calculated by taking the current trading price and dividing it by the company’s earnings. When a ratio is being compared and is lower than its competitors, it means the stock is trading at a discount. This is the case for HD stock, which has a P/E ratio of 22.0 times, while the industry average is 33.0 times.
There is a possibility of HD stock getting a boost in this ratio based on the current earnings growth. The majority of the sales that are generated by Home Depot come from the U.S. In recent years, American consumers have begun spending more, a trend that continues higher. (Source “United States Consumer Spending,” Trading Economics, last accessed January 19, 2016.)
Another piece of evidence of the U.S. economy growing over the past few years has been the recent interest rate hikes by the U.S. Federal Reserve. The Fed made these increases after determining that the economy can withhold a higher-interest-rate-environment. This shows investors that there is real confidence in the economy’s future growth.
Final Thoughts on HD Stock
HD stock should be considered as a stock to own. Shareholders continue to be rewarded with a growing dividend payment. Also consider that Home Depot should see a boost as customer become accustomed to spending more.
