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Why Is This Dow Dividend Stock Down After Raising Its Dividend to a Record High?

Motley Fool - Fri Feb 23, 5:07AM CST

The Home Depot(NYSE: HD) stock reached an all-time intraday high and closing high on Feb. 12. But after the company reported earnings on Feb. 20, its stock fell over 2% on Tuesday morning.

Here's what you need to know about Home Depot and where the dividend stock could be headed from here.

A person wearing personal protective equipment and working with wood in a small, enclosed space.

Image source: Getty Images.

Cooling off

Home Depot's Q4 and full-year fiscal 2023 results weren't great. Sales were down 3%, and diluted earnings per share (EPS) fell 9.5%. "After three years of exceptional growth for our business, 2023 was a year of moderation," said Ted Decker, chair, president, and CEO.

To make matters worse, fiscal 2024 guidance came in muted. Fiscal 2024 includes one more week than fiscal 2023. When taking that into account, sales and diluted EPS are both expected to be down 1%.

In short, Home Depot is expecting negative overall growth over a two-year period. The stock market is always forward-looking, and investors tend to lose patience when there's a downturn in a cycle or growth prospects are years in the future.

Paying for quality

If Home Depot were a high-flying growth stock, guidance that dull would have likely tanked the stock. But Home Depot is anything but that. It trades at a 23 price to earnings (P/E) ratio, a discount to the 27 P/E of the S&P 500.

What's more, Home Depot is a component of the Dow Jones Industrial Average and has raised its dividend every year since it began paying one in 1987 (with the exception of 2008 and 2009). It is an industry-leading business and a fairly priced stock with a reputation for growth over time. Home Depot's track record should help insulate it from a steep sell-off even when results aren't impressive.

Home Depot rewards its shareholders

Home Depot's poor results are a result of weak demand. For what it can control, the company has done a masterful job handling supply chain challenges, inflation, and managing costs. Aside from the strength of the overall business, Home Depot's greatest value add as an investment is its dividend.

Metric

2024 (Projected)

2023

2022

2021

2020

2019

2018

2017

2016

2015

Dividend Per Share

$9.00

$8.36

$7.60

$6.60

$6.00

$5.44

$4.12

$3.56

$2.76

$2.36

Year-Over-Year Increase

7.7%

10%

15.2%

10%

10.3%

32%

15.7%

29%

17%

25.5%

Data source: The Home Depot.

Over the last decade, Home Depot has grown its dividend faster than any other Dow component. You would be hard pressed to find a company the size of Home Depot, or even close to it, that has nearly quadrupled its dividend over the last 10 years. Not to mention Home Depot has also been a market-outperforming stock -- producing a total return just shy of 500%, compared to 230% for the S&P 500.

As you can see in the table, Home Depot's recent 7.7% increase was the lowest percentage increase over the last decade. But from a nominal standpoint, a 70 cent per share, per year raise has been fairly standard over the last five years.

Even the best divided-paying companies rarely raise their dividends that much. For example, Coca-Cola just raised its dividend by 5.4%, which was the largest percentage increase in five years.

Overall, Home Depot's dividend remains an integral part of its investment thesis. It would be irresponsible to raise the dividend by too much given Home Depot's stagnating growth. But rest assured, when Home Depot does return to growth, investors should expect double-digit percentage increases in the dividend as the company continues to use the dividend as its primary way to reward shareholders.

It would be a mistake to overlook another key attribute of Home Depot -- its buybacks. The following chart doesn't account for Home Depot's most recent dividend raise, but it does show the sheer magnitude of Home Depot's dividend increases and buybacks over the last decade.

HD Shares Outstanding Chart

HD Shares Outstanding data by YCharts

Home Depot's ability to fund a growing dividend and buy back stock even as its growth is slowing is a worthwhile incentive for investors to own the stock long-term. Companies that can reward their shareholders in multiple ways (including capital gains, buybacks, and dividends) have an advantage during a slowdown. The more stock Home Depot repurchases, the fewer shares outstanding and the greater the earnings per share. It's what Apple has been doing for several years, and it's a key reason why Apple is a good value.

Think long-term with Home Depot

There's no sugarcoating that Home Depot's fiscal 2023 results and fiscal 2024 guidance were poor. However, the stock isn't overvalued, and the forward dividend yield is now 2.5% -- which is pretty good, though not necessarily in high-yield territory.

Home Depot could be under pressure over the short term as investors digest results and set expectations for yet another weak year. Another challenge is that Home Depot stock is up 18% in the past three months, a move that is hard to justify given the results.

Home Depot is the kind of company that investors can be comfortable owning over the long term. Given the valuation and the quality of the dividend, Home Depot stands out as a stock worth buying now, but there's also no reason it should take off anytime soon. So simply adding Home Depot to your watchlist is fine too.

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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Home Depot. The Motley Fool has a disclosure policy.

Paid Post: Content produced by Motley Fool. The Globe and Mail was not involved, and material was not reviewed prior to publication.

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