Shares of home improvement giant Home Depot Inc (NYSE:HD) had an excellent 2015, rising nearly 28%. Investors in HD stock also had much better returns than they would have gotten if they invested in shares of main rival Lowe’s Companies, Inc. (NYSE:LOW) stock, which was up only about 12% in the same period.
But 2016 has so far been unkind to Home Depot. Overall fears about the economy have lead to a pull back in HD stock that saw it fall as much as 15% in early February. (It has since rebounded with the broader market and is now down about 6.5% for the year.) However, for investors who didn’t get in on HD stock’s 2015 rise, the recent dip might be an opportune time to take a closer look at the stock before earnings Tuesday morning.
Let me explain why.
Home Depot is still finding ways to grow, which speaks well to management’s strategic vision.
In its most recent quarter, the company’s same-store U.S. sales grew by 7.3%, accelerating from the previous quarter’s sales of 5.7% and up from the first quarter’s 7.1%. (Source: “The Home Depot Announce Third Quarter Results; Updates Fiscal Year 2015 Guidance,” Home Depot Inc, November 17, 2015.)
Sales and earnings per share for the third quarter also saw solid growth, increasing 6.4% and 17.4% over the previous year respectively. Management was also very confident going into the holiday quarter, raising guidance for the third time. (Source: “Home Depot Beats Estimates, Raises Guidance of the Third Time This Year,” Briefing.com, November 17, 2015.)
In the latest earnings call, management also said that the company is seeing “broad-based growth across our geographies and product categories, led by growth in transactions from both our DIY and Pro customers.” (Source: Ibid.)
Home Depot is also going on a hiring spree for spring, which is always a good sign that sales are expected to be strong. The company announced that it is planning to hire 80,000 new people to fill various positions at its stores and distribution centers. (Source: “Home Depot Is Hiring More Than 80,000 New Employees,” Fortune, February 3, 2016.)
The hiring spree is also geared to make sure the company’s customers receive great service, which is another way the company can distinguish itself from rivals like Lowe’s.
Home Depot could have been hurt by the rise of e-commerce, but the company has made substantial investments in its e-commerce presence. The company recently re-platformed its web site and added functionality to its mobile apps. Customers can have their products either shipped to local stores for pick up or delivered to their homes.
Home Depot’s e-commerce has not actually become a significant revenue catalyst for the company. In its latest quarter, Home Depot’s e-commerce revenue grew by 25% over the previous year and accounted for about 5.1% of overall sales. More than 40% of those sales were picked up in store. (Source: “The Home Depot Announce Third Quarter Results; Updates Fiscal Year 2015 Guidance,” Home Depot Inc, November 17, 2015.)
The company also recently expanded its e-commerce presence into Mexico, which could be a potential growth stream. Home Depot’s online presence should help it stay ahead of its rivals in the home improvement industry.
Home Depot currently sports a dividend yield of 1.94% and has raised dividends for the past six years. Six years of consecutive growth doesn’t sound impressive, but management didn’t cut dividends either when sales slowed down during the housing bust and financial crisis.
Recently, though, Home Depot has rewarded investors by raising its dividend 25% last year, 20% in 2014, and 34% in 2013. Investors should also expect to see another significant rise in HD stock’s dividend yield in 2016.
In 2014, Home Depot’s board of directors authorized an $18.0-billion share repurchase program. This is a sign that management is confident in the business going forward, and it’s also an action that should support Home Depot stock’s price.