Home Depot: More Optimistic Than Lowe’s?

Summary:

• Home Depot’s recent 10% dividend increase and strong buyback program indicate management’s optimism for the company’s future.
• The company has experienced significant growth in revenue, income, and EPS over the past decade, with a current dividend yield of 2.78%.
• Compared to competitor Lowe’s, Home Depot may be a better option for income-focused investors seeking a higher yield and faster-growing dividends.

When it comes to investing in home renovation giants, two names immediately come to mind: Lowe’s (LOW) and Home Depot (NYSE:HD). As an investor who’s interested in income that grows from year-to-year, I’ve looked into purchasing both. I purchased some shares of Lowe’s late last year, largely because I liked the dividend profile in terms of both the payout ratio and recent dividend growth. Both are great companies that have provided shareholders with a growing dividend for many years. However, when looking at the most recent dividend increase, it appears that Home Depot’s management might be a bit more optimistic for the near future.

Home Depot Financials

Home Depot has a long history of providing outstanding returns for investors. Over the past 10 years, the stock’s price has increased from $77/share to $300/share. That’s a compounded annual growth rate of more than 14.5%, a rate that would cause shares to double in value approximately every five years. Price growth has slowed over the past five years to 8.9%, which would lead to a doubling in price in approximately 8 years. When adding in dividends, the growth looks even better.

The increase in share price has resulted from revenue and income growth over the same period. In the last annual report, HD showed $157.4 billion in revenue. This was an increase of 4.1% over 2021. Revenue has basically doubled over the past ten years, from a base of $78.8 billion. Much of this growth came before COVID stimulus and inflation, which shows that growth has been a long-term aspect of Home Depot’s business, not just a result of inflation and people sitting at home with nothing better to do than complete deferred home improvement projects.

Like its revenue growth, HD has seen income growth over the past ten years. This number has more than trebled from 2013 from $5.385 billion to $17.105 billion. Higher revenue and income are both encouraging signs for investors. When these metrics start to stagnate or decline, investors might rightfully start to get concerned. It is possible that there might be a drop for a year or two occasionally during economic downturns, but sustained long-term growth is a necessity for high investor returns.

EPS has grown even more than revenue and income over the same period, from $3.76 to $16.69 per share. This might seem a bit confusing given the doubling of revenue and tripling of net income. Share buybacks have contributed to this higher increase to earnings per share. In the 2013 annual report, HD had 1.425 billion shares outstanding. The most recent report showed only 1.022 shares on the market. This is a decline of more than 28%. Therefore, each share has a larger claim on the net income.

The company intends to continue buying back shares, at least in the near term. In August 2022, HD announced a program that could see the company buy back an additional $15 billion worth of stock. The number of shares that will buy back will vary upon the share price at the time of the purchase, but at the current price of just above $300, that would take approximately 50 million additional shares off the market. Home Depot bought back $6.7 billion over FY 2022.

The only concern might be if Home Depot decides to take on debt to buy the shares back. Many companies took on debt for buying shares back when interest rates were ridiculously low. With increased borrowing costs, that might not make as much financial sense.

Debt has grown over the past 10 years. Long-term debt is currently at nearly $38 billion, up from about $14.7 billion in the 2013 annual report. The highest interest rate is 5.875% on notes that come due in 2036, although a large percentage of the debt has an interest rate in the 2% to 3% range, with some even lower.

HD’s Dividend

The dividend for Home Depot sat at $1.64 in FY 2013. The company paid out $7.60 in 2022. The current yield is well above the S&P as a whole, coming in at 2.78% as of the close of business on June 23, 2023. According to Seeking Alpha, the payout ratio is currently 48.63%, with an annualized growth rate of 15.75% over the past five years. The payout ratio is basically in line with what the company has had over the past ten years. It has generally ranged between 40% and 50%.

The most recent dividend increase was exactly 10%, from $1.90 a quarter per share to $2.09 a quarter per share. This is what makes me think that HD is more optimistic about the future when compared with Lowe’s.

Lowe’s has a share price that’s increased more rapidly than Home Depot over the past five and 10 years. Over the past ten years, the price of a share of Lowe’s has grown by 18% a year, on average. The biggest difference between the two companies is the growth of EPS for Lowe’s, which has nearly quintupled. Revenue is up about double and income is about triple what it was 10 years ago, much in line with the numbers claimed by HD. Lowe’s has bought back a larger percentage of its shares in recent years. The current dividend is six times what it was 10 years ago, growing from $0.70 a share to $4.20 currently. Lowe’s has a lower payout ratio, currently clocking in at 38.75%.

However, the most recent dividend increase for LOW was 5%, only half what HD offered its shareholders. As a shareholder, this was a bit disappointing, especially considering the lower yield offered by Lowe’s. This might be a sign that management of Lowe’s is less optimistic about the future than the management of Home Depot.

Conclusion

Home Depot is a great company that has provided shareholders with value for decades. The most recent dividend increase, along with a strong buyback program shows that the company is continuing to provide strong value. HD’s management appears to have optimism in providing a strong dividend increase for this year, one that exceeds Lowe’s, a leading competitor that’s historically had larger annual dividend increases. Both are great companies to own, but HD might be a better option for income-focused investors who are looking for a higher yield that’s growing at a higher rate.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of LOW either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I am not an investment professional. The preceding is intended for informational and educational purposes. Please make sure to perform due diligence before investing in equities, as losses up to all capital invested can occur.

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