Home Depot Inc (HD): A Premier Long-term Dividend Growth Stock

Valuation

According to our database of dividend-paying stocks, shares of Home Depot trade at 23.2 times trailing earnings, which is a premium to the dividend stocks in the Consumer Discretionary sector, which have a median price-to-earnings ratio of 19.2.

Home Depot’s dividend yield of 2% is about in line with its five-year average dividend yield. While earnings growth could be in the mid-teens over the next few years under management’s strategic plan, I believe long-term earnings are more likely to grow at a high-single digit rate. Home Depot is already a giant company in a fairly mature company, and

Under my earnings growth assumption, Home Depot appears to offer annual total return potential of 9-11% per year (2% dividend yield plus 7-9% annual earnings growth).

Given my earlier concerns about the mature state of the home improvement retail market, I would prefer to wait for a better entry point on the stock – its current multiple seems a bit high relative to my expectations for long-term growth.

Conclusion

From a fundamental perspective, there’s not much to dislike about Home Depot. The company maintains the largest market share in the home improvement retail industry, benefits from economies of scale, is a supply chain expert, and is positioning itself to remain relevant for years to come by investing aggressively in e-commerce.

Home Depot Inc (NYSE:HD) is a prime example of a blue chip dividend stock. Consistent free cash flow generation, time-tested operations, a strong brand, healthy payout ratios, and consistent earnings growth all contribute to the company’s solid dividend story.

Home Depot is on my watch list for a better entry point and is a high quality company for long-term dividend growth investors to keep an eye on.

Disclosure: None