Image: Home Depot is working through some soft sales trends following robust home improvement spending during the pandemic, but the company’s free cash flow generation remains top notch.
By Brian Nelson, CFA
On February 20, Dividend Growth Newsletter portfolio holding Home Depot (HD) reported mixed fourth quarter results that showed revenue pressure in the period, but the company still beat expectations on both the top and bottom lines. We’re huge fans of Home Depot’s resilience through the ups and downs of the real estate market, and the company’s pace of dividend growth remains solid. Our fair value estimate of Home Depot stands at $369 per share, modestly higher than where it is trading, and the company has a strong 1.4x Dividend Cushion ratio, which speaks to future dividend expansion.
During the fourth quarter, revenue dropped 2.9% on a year-over-year basis, as the firm experienced overall comparable store sales pressure of 3.5% led by a comp decline of 4% in the U.S. Net income for the period fell to $2.82 per diluted share compared with $3.30 per diluted share in the same period a year ago, a decline of 14.5%. Home Depot has worked through what it describes as a “year of moderation” after years of strong growth from pandemic-driven spending, and while the company may still feel some near-term pressures, we like Home Depot’s positioning in the burgeoning home improvement market, which should help to propel further dividend increases. The company raised its dividend 7.7% to a quarterly payout of $2.25 per share, or $9 on an annualized basis, reflecting a forward estimated dividend yield of ~2.5%.
Looking ahead to fiscal 2024, Home Depot is forecasting total sales growth of 1%, including the 53rd week of sales for the fiscal year, and comp sales to decline modestly over the 52-week period. The home improvement retailing giant plans to add 12 new stores in fiscal 2024 and is targeting diluted earnings per share growth of approximately 1% for the period. Though Home Depot has a rather large net debt position, its free cash flow generation remains robust. In fiscal 2023, it hauled in ~$21.17 billion in operating cash flow and spent just ~$3.23 billion in capital expenditures, resulting in free cash flow generation of ~$17.95 billion, a huge leap from fiscal 2022’s tally, and significantly higher than the ~$8.38 billion it spent in cash dividends in fiscal 2023. Customer transactions and average ticket remain under pressure at Home Depot, but the firm’s business model is built for sustainability, and we like shares.
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Tickerized for HD, LOW
Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, RSP, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson’s household owns shares in HON, DIS, HAS, NKE, DIA, RSP, SCHG, QQQ, and VOO. Some of the other securities written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.
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