Home Depot Inc (NYSE: HD) shares fell despite the home improvement retailer beating earnings expectations. Here’s why it’s a long-term buy and hold stock for any portfolio.
Tim’s Take:
Home Depot’s latest set of earnings were impressive. Yet the market didn’t view them that way. The big box retailer focuses on home improvement hardware and goods.
A lot of Home Depot’s clients are professional contractors who purchase construction products, tools and other services from the company’s massive stores.
However, Home Depot has also made a successful entry into the DIY space, with people who want to take on their own home improvement projects.
Home Depot reported a solid set of earnings yesterday, with third-quarter sales clocking in at US$33.5 billion. This was way ahead of the US$31.8 billion that analysts were looking for.
Omnichannel retail
Similarly, same-store sales blew past estimates of 17.2% as consumers’ spending helped push that number up to a healthy 24.1% during the period.
Meanwhile, earnings per share (EPS) was up a stonking 25.8% year-on-year to US$3.18 in the latest quarter.
Of course, there were increased costs to contend with. Cost of sales was up a similar amount to EPS – rising 24% year-on-year.
One reason it has thrived in the current environment is the fact it’s invested in its digital capabilities with services such as “curbside pickup”. This strength has been shown in its digital sales growth of 80% year-on-year (see below).
Source: Home Depot Q3 2020 earnings infographic
Cleaning stores more regularly and providing protective equipment to front-line staff has obviously weighed on costs.
The rise in costs, though, I take as a positive. It shows the company’s leadership takes the pandemic, and its staff’s well-being seriously.
News that Home Depot would be spending up to US$1 billion to raise annual wages for front-line employees should also be seen as a longer-term positive for the company’s reputation.
Spending on the home
It’s easy to see why Home Depot has benefitted so much amid the lockdowns. It was deemed an “essential retailer” at the height of the virus surge in March and April so its stores stayed opened throughout the nationwide lockdowns in the US.
With more people now looking like they’re going to be back indoors for the long winter ahead, projects around the home are likely to be high on the agenda.
The upshot? People will be purchasing goods from Home Depot. Management stated as much; the company is seeing more transactions and higher ticket prices.
What this means is that people are buying more often but also, every time they do buy, they’re buying more in each transaction.
Acquisitions and dividends
Home Depot also recently announced an US$8 billion offer to buy HD Supply Holdings Inc (NASDAQ: HDS), an industrial supplies distributor it has actually previously spun off to private equity back in 2007.
The deal should give Home Depot extra earnings growth as it looks to solidify its position in the professionals market.
Finally, Home Depot has been an unbelievable dividend growth stock. Probably little known to investors, the company has actually grown its dividend every year since 2010.
Although Home Depot stock only yields 2.2%, it has grown its annual dividend per share from US$0.945 in 2010 to US$6 in 2020.
That’s equal to a compound annual growth rate (CAGR) of 20.3%. That’s impressive for a company the size of Home Depot.
It admittedly does not have the same Dividend Aristocrat status as its competitor Lowe’s Companies Inc (NYSE: LOW), which serves more DIY consumers of home improvement products.
Yet if long-term investors want a rock-solid retailer that will keep chugging along, while also paying out a growing dividend from its huge free cash flow, Home Depot could be a great option.
Disclaimer: ProsperUs Head of Content Tim Phillips owns shares of Home Depot Inc.
