Home Depot Inc (NYSE:HD) has paid uninterrupted dividends since the late 1980s and is a dividend growth machine.
Since making its first quarterly dividend payment of 0.044 cents per share in 1987, Home Depot’s dividend has increased to 69 cents. The quarterly dividend has also more than doubled since 2012.
Home Depot possesses many of the qualities I love to see in a business. It earns a high return on invested capital, generates excellent free cash flow, maintains healthy payout ratios, operates in a slow-changing industry, and has created substantial value for shareholders over time.
This is the type of business I like to own in our Top 20 Dividend Stocks portfolio. While Home Depot’s current dividend yield (2%) is too low for some income investors, dividend growth potential is excellent and management expects earnings to continue compounding at a double-digit rate over at least the next several years.
Let’s take a closer look at this premier long-term dividend growth stock.
First though, let’s see how a collection of the top investors in the hedge fund world have been trading it of late. Home Depot was in the portfolios of 74 of the investment firms tracked by Insider Monkey as of March 31, up from 62 on December 31. Those 74 investors held 2.80% of the home improvement retailer’s shares, valued at $4.63 billion. Billionaires Andreas Halvorsen, Ray Dalio, and Stanley Druckenmiller were among the new shareholders of the stock during the first quarter.
Business Overview
Home Depot began operating in 1978, approximately 32 years after Lowe’s Companies, Inc. (NYSE:LOW) was founded. Despite its later start date, Home Depot is now the world’s biggest home improvement retailer with about $88 billion in annual sales.
The company has more than 2,200 retail stores (Lowe’s has over 1,800 locations) and maintains the number one market share position in the U.S., Mexico, and Canada.
Home Depot’s stores carry around 35,000 items covering a wide variety of building materials, lawn & garden products, and home improvement products. Its online catalog maintains over 1 million products. Online sales represent a little over 5% of Home Depot’s total revenue and have about tripled over the last few years.
The majority of the company’s customers are do-it-yourself consumers, who account for roughly 60% of Home Depot’s total sales.
Professional contractors, which only account for 3% of Home Depot’s total customer base, generate 40% of the company’s total sales because they spend much more on projects each year.
Business Analysis
Home Depot’s dominance in the home improvement market primarily stems from its economies of scale, strong brand recognition, valuable real estate locations, supply chain expertise, customer service, and leading breadth of products and services.
As the largest player in the market, Home Depot is the low-cost provider and can afford to offer one of the broadest lineups of products and services while investing in in-store displays and service staff to help customers get everything they need for their next project.
Home Depot’s employee base is another advantage. According to the company’s investor day presentation, the average tenure of store managers is over 14 years with Home Depot, and 94% of department supervisors started as sales associates. This helps the company provide more consistent project support to customers shopping in the store.
Home Depot also enhances its customer experience by partnering with suppliers to bring innovative and exclusive items to the market that help customers save time and money. Many suppliers depend heavily on Home Depot and have little bargaining power.
Smaller rivals cannot match Home Depot’s offerings, breath of merchandise, brand recognition, customer experience, and price points.
The company’s extensive IT systems and supply chain form other competitive advantages. Moving and selling millions of products is almost mind-boggling, but Home Depot has developed the extensive know-how needed to be a successful retailer.
This is particularly important when it comes to e-commerce. The company is focusing on creating a better customer experience, increasing the connection between its stores and website.
Home Depot has been opening massive direct fulfillment centers to meet the needs of online shoppers, and the company was even named Internet Retailer of the Year in 2015.
These investments improve Home Depot’s ability to scale and better meet the needs of online shoppers. Smaller rivals with less cash to invest and a smaller store network cannot keep up with Home Depot. If I had to guess, this will cause the market to further consolidate over the next decade.
Finally, with so many different products and a constant need to maintain properties, the home improvement market has simply proven to be resilient and slow-changing over the years.
A handful of major players control the majority of this mature market, making it very difficult for new entrants to disrupt the space.
