Today I return to the DOW 30 component stocks with Home Depot (HD). Home Depot has a typical S&P 500 dividend yield and payout ratio. It has be an exceptional dividend grower. It is approaching speculative pricing and it has some weak aspects to it’s balance sheet. To see how I came to those conclusions read on.
Home Depot (HD)
Price: $48.83
Shares: 1.52 billion
Market capitalization: $74.45 billion
What does the company do: Home Depot is the world's largest home-improvement specialty retailer, operating 2,250 warehouse-format stores throughout the United States, Canada, Mexico, and China. The company's stores offer products and services for home construction, renovation, remodeling, and maintenance. The firm is based in Atlanta and employs more than 300,000 people.
Morningstar’s take: Home Depot, the world's largest home-improvement retailer with more than $70 billion in annualized revenue, spent the last three years battling economic headwinds and updating its distribution network. After a decade of aggressive expansion and store and concept growth, the company changed course; it sold its professional supply business in 2007 and closed its ancillary retail businesses in early 2009. Home Depot is now solely focused on its orange box stores and is engaged in a strategic overhaul of its supply chain. We believe the ongoing upgrades will strengthen the firm's competitive position, particularly as macroeconomic pressures abate in the coming years. The firm earns a wide economic moat rating because of its substantial economies of scale.
Bonds: $10.3 billion outstanding
Times interest earned: Home Depot earned $3.883 billion in the year ending the first quarter of 2012. For some reason Morningstar’s financials aren’t displaying last year’s interest expenses, so I will use the average over the previous four years ($631.5 million). Home Depot earned 6.15 times its interest expenses; its bonds are not a threat to its dividend. Earning more than five times the interest expenses demonstrates that the interest expenses are not a threat to the dividend.
Preferred stock: none
DIVIDEND RECORD: Home Depot has been growing its dividend since at least 1987. Back in 1994 the quarterly dividend was $0.01 per share. Today the dividend is $0.29 quarterly. That is 2,800% straight-line growth over 18 years or 155% per year. The missing dividend payment in 4Q 2009 on the picture below is just a Google Finance display problem. Home Depot made that dividend payment.
Dividend: $0.29 quarterly
Dividend yield: 2.4% ($1.16 annual dividend / $48.83 share price)
Dividend payout: 44% using most recent EPS of $2.65 –OR- 45% using average adjusted earning power of $2.57
EARNING POWER: $2.57 @ 1.52 billion shares
(earnings adjusted for changes in capitalization – typically share buybacks and/or additional shares created)
EPS | Net income | Shares | Adjusted EPS | |
1/2006 | $2.26 | $5,001 M | 2,216 M | $3.29 |
1/2007 | $2.72 | $5,838 M | 2,147 M | $3.84 |
1/2008 | $2.37 | $4,395 M | 1,856 M | $2.89 |
1/2009 | $1.34 | $2,260 M | 1,686 M | $1.49 |
1/2010 | $1.57 | $2,661 M | 1,692 M | $1.75 |
1/2011 | $2.01 | $3,338 M | 1,658 M | $2.20 |
1/2012 | $2.47 | $3,883 M | 1,570 M | $2.55 |
Seven year average adjusted earnings per share is $2.57
Consider contrarian buying below $20.56 (8 times average adjusted EPS)
Consider value buying below $30.84 (12 times average adjusted EPS)
Home Depot (HD) is currently trading at 19 times average adjusted EPS. This is stock is priced for investment, but at 20 times it will be speculatively priced.
Consider speculative selling above $51.40 (20 times average adjusted EPS)
BALANCE SHEET – Declining assets and stagnant shareholder equity. The price to book value ratios by any measure are extremely high. I don’t like HD’s quick ratio because they have so little cash to weather another financial crisis.
Book value per share: $11.77 ($17.878 B shareholder equity / 1.52 B shares)
Price to book value ratio: 4.15 (under 1.0 is good) HD investors are paying $4.15 for each $1.00 of book value for each share.
Tangible book value per share: $11.04 (shareholder equity less intangibles of $1.12 B / 1.52 B shares)
Price to tangible book value: 4.42 (near 1.0 is good) HD investors are paying $4.42 for each $1.00 of tangible book value. That is a huge premium.
Current ratio: 1.55 latest quarter (over 2.0 is good) Why don’t corporations improve the strength of their balance sheets instead of buying back shares?
Quick ratio: 0.21 latest quarter (over 1.0 is good) HD has very little cash compared to its current liabilities. Another financial crisis will produce a crisis at Home Depot.
Debt to equity ratio: 0.60 (lower is better)
Percentage of total assets in plant, property, and equipment: 60.34% (the higher the better) All those big box stores add up. Other asset percentages of the total assets were: current assets 35.84%, intangibles 2.76%, and other long term assets were 1.06%
Working capital trend: up slightly
CONCLUSION – Home Depot could be bought in March 2009 for $18.00 per share. The stock was much closer to a value investment at that price. It is trading for 19 times its average adjusted earnings which is very close to speculative pricing. I would sell it now if I owned it because the US economy is visibly reentering recession and the European sovereign debt crisis is putting pressure on world stock markets. I wouldn’t even consider buying Home Depot until it drop below $30.00 per share. Home Depots 2.4% dividend yield is near the S&P 500 average dividend yield of 2.2%. They shine with their dividend growth. They could strengthen their balance sheet by using some of the share buyback money to put into current assets.
DISCLOSURE – I don’t own Home Depot (HD).
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