This isn’t a company I had considered looking at before. I was surprised at the high levels of commitment to shareholders and employees, along with a robust crisis response setup. A predominantly American company, with some expansion into Mexico and Canada, what can they offer us as investors?
What Does Home Depot Do?
With the tagline of “How doers get more done” it couldn’t be clearer. They help people who do things, do them more, I guess?
Home Depot is in the home DIY and building materials business. Think B&Q in the UK, but much much bigger. They are the world’s largest home improvement speciality retailer, with 2,293 retail stores, and employing over 400,000 staff.
Their business is split by the type of customer and the products they sell. You’ll find in their reports they mention different channels and customer types, but in terms of financial reports, they drop all of these mentions. This does make it a bit trickier to describe their business to an investor.
Source: Home Depot Q1 2020 Infographic
Home Depot thinks about its customers in three groups. Typically DIYers, this is the volume business. Regular folks like you and me doing some improvements around the house, or in some cases tackling larger projects ourselves.
The “Pro” side of the business is services and special agents who look after builders/companies that work with multiple customers. This is classified internally as B2B sales and managed as such. Expect bulk purchases, complex requirements, extended use of Home Depots logistic abilities, but loyal reliable customers.
Finally, they talk about the DIFM customers. Do-it-for-me customers know what they want (so they don’t need to use a Pro) but they are either unable or don’t know how to execute on their vision. They will come into the store and purchase what is required or want some consultation before hiring some labour to complete the work.
Source: Home Depot 2019 Full Year Report
The focus for Home Depot since 2017 has been a seamless experience from planning a project or DIY idea, to finding the materials or experts, credit options to make the project achievable, to purchasing and delivering the goods, to construction and a finished project. There is a large amount of scope to what Home Depot can focus on, and they have largely avoided being a service provider, to DIYers or DIFM customers, to avoid annoying their Pro customer base. This does mean they are leaving money on the table in terms of a complete offering, but it gives them a greater focus on logistics and operational excellence.
Risks and COVID-19
If there is anything I know about America is natural disasters appear to be a way of life. As a large multi-national retailer who has existed for over 40 years, they have coped with countless crisis.
That is a long-winded way of saying if Home Depot can manage their stores in a post-hurricane devastated land, they can adjust their business to a pandemic.
Unlike some companies, Home Depot has not drawn down on their revolving credit facility.
Rather they have put together $850m in support for their staff. Changed opening hours, limited customers access, and cancelled high footfall events. From expanded paid time off, additional time off for any staff considered at risk, weekly bonuses and doubled over time, and extended care benefits, few companies have been considered “essential businesses” can claim this kind of response.
While Home Depot does consider their services essential, and anyone who has had home trouble while in lockdown would agree, it has harmed their business. The Pro’s are no longer working on projects, larger home DIY plans scrapped, and any DIFM customers would be in lockdown and waiting.
As you would expect, the 2020 guidance has been pulled. What you might not expect is a first-quarter cash dividend of $1.50 per share, which is a 10% increase. The ex-div date is the 4th of June and paid out on the 18th. Meaning this is the 133rd consecutive quarter Home Depot has paid a cash dividend.
What About The Fundamentals?
Home Depot boasts some very strong fundamental figures. Even in the middle of a pandemic, and without drawing additional debt, they are operating from a very strong position.
Source: Genuine Impact
With an annual revenue (which keeps growing) of $110.2bn and a profit margin of 10.20%, this is a cash generation machine. With a lower than expected gross margin of 34.09%, you can see how much they squeeze the operational aspects of the business. A bigger effort to own brand and cheaper wholesale products would improve the gross margin but it’s currently not the focus.
A 54.23% payout ratio, and 33.27% return on invested capital are both attractive figures. An overwhelming focus on keeping shareholders happy, and turning the staff into shareholders is a common practice but one Home Depot executes on extremely well.
I was surprised to see 106% debt to assets ratio.
Source: Home Depot 2019 Full Year Report
Even for a profit-generating business like Home Depot, they do have a lot of short term debt which needs paying off. I wouldn’t be surprised if they refinance some of their debt and restructure it is slightly.
As a value investment, Home Depot is relatively cheap compared to its assets and inventory. As they own the land and buildings for the majority of their stores (only the buildings for the warehouses, not the land) they have a lot of assets to compare their share price against.
Source: Google Finance Home Depot
Despite being at an all-time high, Home Depot still comes in with a 23.51 P/E ratio and even an impressive -82.11 Price to Book. It’s worth taking into account a large number of retail stores, and the risk of changing consumer tastes, Home Depot could easily end up with a lot of dead inventory taking up space and slowing their business down.
While they claim this is a USP to their business, their ability to manage their inventory and stay on the pulse with consumer habits, it worth considering when we assess their assets.
In terms of the analyst predictions, we have a very strong outlook for the future of Home Depot.
Source: Genuine Impact
Even with the 2020 guidance removed, and parts of the core business being hit hard, the sell-side analysts are still bullish on their outlook.
Source: MarketBeat Home Depot
The good news is most the analysts have refreshed their ratings last week, meaning we are up to date with their views. The downside is a very low target price increase from where we currently are.
This makes it unlikely we will see any aggressive price growth, however, given the quarterly dividend payouts, and the strong financial position they have created, this is a very attractive dividend option even in trying times.
A Buy For A Dividend?
I am definitely on the buy train for this stock. Home Depot has a great dividend track record, and they see it as the main method of returning capital to shareholders.
While the percentage increase in your portfolio is going to move slowly, the payouts won’t. A 2.48% dividend yield isn’t going to change anyone’s life and there are bigger yields to be found. However, few firms have the stability, scale, and track record of Home Depot.
If you are looking for an all-weather deck or a defensive regular dividend payout, Home Depot might be the one for you.
Let me know what you think, is this a stock you are interested in? Any other stocks or funds you would like me to assess?
Thanks for reading and stay safe!