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This Home Depot Dividend Achiever review looks at whether Home Depot (HD) is reasonably valued so as to initiate a position in the FFJ Portfolio.
There has been an evolution in the term Dividend Achiever. We now have multiple Dividend Achiever Indexes. In a nutshell, however, a Dividend Achiever is a company with a history of enhancing shareholder value through the return of capital to shareholders.
A Dividend Achiever is either listed on the NYSE or the NASDAQ. A company must meet various criteria to become a member of this group as per NASDAQ's Dividend Achievers Index Methodology. The NYSE has similar criteria.
Some investors may argue that HD is not a Dividend Achiever because it has not increased its dividend for 10 consecutive years.
However, we see from HD's dividend history that this string of 10 consecutive years is broken because HD accelerated its dividend increase by 1 quarter in November 2011. HD typically increases its quarterly dividend in February. Rather than declare an increase in February 2012, HD declared an increase from $0.25 to $0.29 on November 15, 2011; it distributed 3 quarterly $0.25 dividends in 2011 as opposed to 4. It defies all logic to think that HD should be excluded from the list of Dividend Achievers merely because the Board decided to reward investors with a dividend increase 1 quarter sooner than expected.
Information Sources
The following are links to my sources to aid in your own analysis.
NOTE: HD's FYE is typically the last business day of January or the first business day of February. The most recent FYE is January 31, 2021, but the financial statements reflect fiscal 2020.
Part 1 of the FY2020 10-K has a good overview of HD's industry, customers, business strategy, solutions and risks. Additional information is also available in the following:
- Q1 2021 Earnings Release and Q1 2021 Non-GAAP Reconciliation;
- Q1 2021 10-Q; and
- May 20, 2021 Shareholder Meeting presentation.
Home Depot - Dividend Achiever Review - Business Overview
HD is the world's largest home improvement retailer. It generated ~$132.1B of revenue in FY2020, a $21.9B or 19.9% increase from FY2019.
Revenue expectations for FY2021 are more than $140B. Contributors to HD's projected top-line growth are:
- HD's efficient supply chain;
- improved merchandising technology; and
- penetration of adjacent customer product segments which is bolstered by the December 2020 acquisition of HD Supply.
HD benefits from its economies of scale and brand equity.
Improvement in merchandising and the flexible distribution network provides HD with rapid delivery thus improving the do-it-yourself experience. HD's market delivery centers also cater to professionals.
The robust real estate market is also a tailwind.
HD Supply Acquisition
On November 16, 2020, HD announced its definitive agreement to acquire HD Supply for ~$8B. HD Supply is a leading national distributor of MRO products in the multifamily and hospitality end markets. This acquisition was completed on December 24, 2020.
Funding was from cash on hand of which a portion was replaced with the proceeds from HD's January 2021 debt issuance (pages 61 - 63 of 83 in the FY2020 10-K).
An overview of HD Supply's Supplies, Solutions & Savings and the company's history is available here.
Details of the HD acquisitions are found starting on page 71 of 83 in the FY2021 10-K.
Home Depot - Dividend Achiever Review - Financials
Q1 2021 Results
On May 18, 2021, HD reported Q1 sales of $37.5B, a 32.7% or $9.2B increase from Q1 FY2020. Comparable sales for Q1 increased 31% and comparable sales in the U.S. increased 29.9%.
Net earnings in Q1 2021 were $4.1B, or $3.86 per diluted share, compared with net earnings of $2.2B, or $2.08 per diluted share, in Q1 2020; this is a ~85.6% increase.
FY2021 Guidance
At the release of FY2020 results in February 2021, management indicated the uncertainty of the duration of the COVID-19 pandemic and its influence on the consumer is such that FY2021 guidance is not being provided.
Management did, however, state that if the demand environment during the second half of FY2020 persists through FY2021, a flat to slightly positive comparable sales growth and operating margin of at least 14% is reasonable.
Operating Cash Flow (OCF) Free Cash Flow (FCF)
Looking at the Condensed Consolidated Statement of Cash Flows in the historical 10-Ks we have FY2011 - FY2020 OCF of (in $B):
6.65, 6.98, 7.63, 8.24, 9.37, 9.78, 12.03, 13.17, 13.69, and 18.84.
Back out CAPEX and we end up with FY2011 - FY2020 FCF of (in $B):
5.43, 5.66, 6.24, 6.80, 7.87, 8.16, 10.13, 10.72, 11.01, and 16.38.
In Q1 2021, HD's OCF is $6.31B. Back out $0.53B in CAPEX and FCF is ~$5.78B. From this, HD repurchased ~$3.8B of common stock, distributed ~$1.8B in dividends, and repaid ~$1.4B of long-term debt for a total of ~$7B. The ~$1.22B variance between the major disbursements and FCF came from a similar reduction in cash.
Home Depot - Dividend Achiever Review - Credit Ratings
Moody's currently rates HD's senior unsecured domestic currency debt A2. S&P Global and Fitch assign an A rating. The 3 ratings are the middle tier of the upper-medium grade category.
These ratings define HD as having a STRONG capacity to meet its financial commitments. However, it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.
These investment-grade ratings are acceptable for my purposes.
Dividend and Dividend Yield
On February 23, 2021, HD announced that its Board approved a 10% increase in its quarterly dividend from $1.50/share to $1.65/share or $6.60/share annually. This dividend marked the 136th consecutive quarter HD has paid a cash dividend (see HD's dividend history).
Based on the current ~$311 share price, the annual $6.60 dividend yields ~2.1%.
In Q1 2021, HD distributed $1.75B in dividends while in FY2016 - FY2020 it distributed $3.404B, $4.212B, $4.704B, $5.958B, and $6.451B for a total of ~$24.8B.
There is nothing foreseeable to raise a concern about HD's ability to extend its track record of consecutive quarters of dividend payments.
In FY2016 - FY2020, HD repurchased $6.88B, $8B, $9.963B, $6.965B, and $0.791B of issued and outstanding shares for a total of ~$32.68B.
A decision was made to suspend share repurchases in March 2020 when COVID-19 hit North America. HD resumed share repurchases in Q1 2021 and $3.788B of common stock was repurchased.
Home Depot - Dividend Achiever Review - Valuation
Valuation - Adjusted Earnings
Adjusted diluted EPS guidance from 32 brokers is a mean of $14.16 and a range of $13.44 - $15.37. With shares trading at ~$311, the forward adjusted diluted PE range is ~20 - ~23 and is ~22 using the mean guidance.
Valuation - GAAP
In FY2020, HD generated $11.94 of diluted EPS and in Q1 2021 it generated $3.86. Management does not provide guidance, however, diluted EPS of ~$13.50 - ~$14 does not seem unreasonable. If we use the current ~$311 share price, the forward diluted PE range is ~22.2 - ~23 and ~22.6 if we use the $13.75 midpoint.
By way of comparison, HD's FY2011 - FY2020 historical PE levels are: 18.04, 21.93, 22.25, 23.86, 24.77, 21.73, 26.29, 18.76, 21.71, and 22.96.
Using the $13.75 midpoint and a forward diluted PE of 20 I deem to be more reasonable, the share price at which I would consider initiating a position is closer to ~$275.
Home Depot - Dividend Achiever Review - Final Thoughts
Market conditions are such that many investors are investing without giving much thought to a reasonable valuation; HD's share price has surged since the beginning of March 2021 to the point where shares are now overvalued.
As much as HD is a high-quality company in which I am prepared to initiate a position, I can not justify acquiring shares at the current valuation. I will patiently wait for an entry point closer to ~$275.
Stay safe. Stay focused.
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclosure: I do not currently hold a position in HD and do not intend to acquire shares within the next 72 hours.
Disclaimer: I do not know your individual circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your own research and due diligence. Consult your financial advisor about your specific situation.
