1 Stock Up 1,000X

For investors, finding a stock that can generate a 10, 20 or 30 times return on investment is a win to be celebrated.

In a tiny number of cases, however, companies manage to deliver results that blow even these positive returns out of the water.

Surprisingly, one such company is home improvement leader Home Depot (NYSE:HD). Here’s how Home Depot has managed to deliver well over a 1,000x return since its IPO.

Home Depot Hit the Ground Running

While many young companies see their stocks fall or plateau after their IPOs, Home Depot began to generate solid returns for early investors almost immediately. The company went public after just two years in business in 1981, issuing its first shares at a price of $12. Using the capital from its public offering, Home Depot began building larger, more profitable stores.

Within one year of the IPO, shares had tripled. By the time five years had passed, shareholders had already seen their initial investment multiplied by ten. These early years saw aggressive expansion as the company built new stores and grew its revenue stream.

In fact, Home Depot grew so fast during this period that management began a series of stock splits. In 1982 alone, the stock split three times as prices soared. This was followed by another split in 1983, by which time shares were already trading for $54 apiece.

From Startup to Home Improvement Giant

As with many fast-growing companies, Home Depot may have moved too fast in its early years. By 1986, despite the enormous returns shareholders had earned, the company’s debt load from its expansion efforts began to exert a drag on earnings.

Home Depot demonstrated the kind of long-term forethought that would eventually lead it to the top of its industry. Rather than continuing to prioritize growth, the company reduced its expansion efforts, offered a block of new shares and used the capital to pay down its debts.

While the company’s expansion eventually resumed, Home Depot’s decision to prioritize financial stability over momentary revenue and earnings growth laid the groundwork for more steady, predictable performance.

Once it was past this difficult period, the company continued to build new stores. Throughout the 1990s and into the present day, though, Home Depot also started acquiring businesses that linked up well with its strategic goal to become the dominant force in home improvement.

One of the earliest major acquisitions took place in 1997, when Home Depot bought out Maintenance Warehouse. In the following years, the company bought everything from interior decor companies to HVAC specialists.

These strategic acquisitions proved to be a vital part of Home Depot’s growth. By buying specialized companies and integrating them under the Home Depot umbrella, the company was able to create a nearly impenetrable moat around its business.

Critically, all of the company’s acquisitions related in one way or another to the broader home improvement business. While the companies that were acquired operated in many different fields, Home Depot never ventured too far from its focus market.

This same approach has also helped Home Depot navigate the turn toward eCommerce in the last several years.

After investing nearly $300 million in logistics and supply chain upgrades, it has created a highly successful eCommerce business that leverages its existing network of physical stores and warehouses.

Thanks to these investments and the more physical nature of the home improvement business, Home Depot has even managed to insulate itself from Amazon and other online retailers.

Cumulatively, these efforts to grow the business have reliably raised earnings and turned Home Depot stock into a seemingly perpetual compounding machine. Since 2010, annual earnings have risen from about $1.30 per share to well over $15.

Over the same time frame, the company’s total market capitalization has grown from under $50 billion to over $350 billion. Today, the company averages a return on assets of 20.6% and a net margin of 10.2%.

The Role of Dividends

As with many long-term compounding stocks, Home Depot also leans heavily on dividends to bolster shareholder returns.

Since January of 2014, for example, HD has generated a total return of 455.5% with dividends reinvested.

Of this, only 341% is accounted for by increased share prices. Though specific to Home Depot, this example nicely illustrates the broader lesson of just how important dividends are in total returns over long periods of time.

How Much a $1,000 Investment in Home Depot’s IPO Would Be Worth Today?

Despite not operating in a high-growth sector like tech or pharmaceuticals, Home Depot is one of the best historical investments of the last 40 years.

Counting dividends, a $1,000 investment in the Home Depot IPO would be worth over $29 million at today’s prices.

How High Will Home Depot Stock Go?

According to the consensus of 25 analysts, Home Depot stock could rise to as high as $353 per share.

Having achieved dominance in its industry and grown by leaps and bounds, it’s obvious that Home Depot can’t replicate its past rates of return at its current scale. However, the stock could still be a respectable buy for long-term growth. At 23.8x expected forward earnings, the stock is priced close to the S&P 500 average of 22.9.

As noted above, Home Depot’s dividends have always been an important part of its returns. Today, HD shares yield 2.3%, and the dividend payout ratio is a reasonable 54%. Critically for dividend growth investors, the company continues to prioritize dividend increases as its earnings rise. Over the last 10 years, the average compounded dividend growth rate has averaged 18.3%.

Home Depot is also returning cash to shareholders in the form of share buybacks. In August, management authorized $15 billion in repurchases, continuing a long trend of allocating capital to buybacks. Since 2010, the number of outstanding HD shares has declined from 1.7 billion to 999 million.

Overall, Home Depot still looks to be a decent buying opportunity for investors seeking stable long-term growth. At the moment, 18 of the 38 analysts covering the stock rate it as a buy. Four rate it as overweight, while 13 have offered hold ratings. Only three analysts have rated the stock below a hold.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.