Investing in the stock market is fun and exciting simply because there are so many different strategies. Some of the more risk-accepting investors will lean toward growth tech stocks and cryptocurrencies, while risk-averse investors could gravitate to safer, established, profitable enterprises that provide steady returns.
That latter category of businesses might include dividend payers, a smart way to boost portfolio gains by doing absolutely nothing. If you’re an investor who loves generating passive income from your holdings, then take a look at Home Depot (HD -0.14%). The giant retailer has been paying out dividends since 1987.
Taking care of shareholders
Since its initial public offering in September 1981, Home Depot’s stock has skyrocketed 1,500,000% (as of Jan. 24). That remarkable performance crushes the S&P 500 by a wide margin. With a market cap of $323 billion today, Home Depot has become one of the largest and most dominant businesses in the world.
It’s not difficult to understand why Home Depot has achieved such outstanding success. For starters, the company operates in the massive home improvement industry, which management estimates is worth $900 billion today. Customers, both do-it-yourselfers and professionals, wanted a one-stop shop to handle all of their needs for renovation tools, supplies, and guidance, which was primarily being handled by independent hardware stores. With its huge warehouses, Home Depot offered a better solution, with greater choice, better pricing, and improved customer service. Even today, the market is highly fragmented. Based on its trailing-12-month sales of $157 billion, Home Depot only commands 17.4% of the industry, leaving plenty of room for growth in the decade ahead.
What’s impressive about the Home Depot growth story, at least in the past 10 years, is that financial gains haven’t come as a result of opening new stores. A decade ago, there were a total of 2,250 Home Depot locations worldwide. Today, there are 2,319, good for a 3% expansion of the entire footprint. The key has been to raise sales volume per store by investing in supply chain initiatives, better training staff, and building out a seamless omnichannel shopping experience. Increasing share from professional customers helped, too.
Sales per square foot went from $307 10 years ago to $619 in the latest quarter (Q3 2022 ended Oct. 30), with the operating margin expanding from 9.6% to 15.8% in that same period. And during the most recent quarter, the return on invested capital was a superb 43.3%.
Home Depot’s financial success has translated to lots of operational cash flow, to the tune of $18.8 billion and $16.6 billion in fiscal 2020 and fiscal 2021, respectively. Excess cash can mean returning capital to shareholders. Home Depot started paying a dividend in 1987 and has steadily increased it over the years. In the latest quarter, the company paid a dividend of $1.90 per share, good for a 2.4% annualized yield at today’s stock price of $316.
What’s more, Home Depot has engaged in large amounts of stock buybacks as well. Between fiscal 2011 and fiscal 2021, the business reduced its outstanding share count by roughly one-third, further boosting investors’ returns. It’s hard not to like a company that is so focused on taking care of its shareholders with generous capital return policies.
Consider the valuation
After posting stellar growth throughout the depths of the coronavirus pandemic, the business is experiencing a bit of a slowdown, with revenue up 5.6% and same-store sales up 4.3% year over year in the most recent quarter. And investors are worried about how higher mortgage rates and a cooling housing market will continue to impact the home improvement giant. Therefore, it’s probably not surprising that Home Depot’s stock was down 24% in 2022.
Shares currently trade at a price-to-earnings (P/E) multiple of 19. That’s below Home Depot’s trailing five- and 10-year averages. And this valuation is cheaper than rival Lowe’s P/E of 20. In addition to receiving a solid passive income stream, Home Depot shareholders could benefit from outsized price appreciation.
Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot. The Motley Fool recommends Lowe’s Companies. The Motley Fool has a disclosure policy.