The last few years have provided an unexpected tailwind for home-improvement companies. As demand spiked among DIY home fixers, plumbers and electricians, Home Depot (HD) benefited.
A combination of stimulus money and homeowners investing in their own properties created a perfect storm for Home Depot, which grew revenues 19.9% between 2020 and 2021, and a further 14.4% top line growth in its 2022 fiscal year.
Top line sales and share prices weren’t the only things on the rise. Payouts to investors rose too. During 2020, investors received $1.50 in dividends every quarter. In 2021, dividend payouts went up to $1.65 per share. After the first quarter of 2022, investors received $1.90 in dividend payouts.
The picture sounds rosy so far, but what’s the catch? Here are 3 things you need to know before investing in this blue chip titan.
[1] Single-Digit % Growth Looms On The Horizon
The bad news is that Home Depot’s executives expect growth to taper.
Overly the last decade, Home Depot has had an annual growth rate of 7.9%. That’s impressive growth. But we need to remember that the past couple of years have contributed to that growth. That includes the 19.9% in 2021 and 14.4% in 2022 (Home Depot’s fiscal year ends in January, so the 2022 fiscal year ends at the beginning of the calendar year).
Prior to the pandemic years, Home Depot hadn’t grown by double digits in at least 10 years.
In 2023, revenues are estimated to reach $153 billion, representing essentially a flatline over 2022. And 2024 revenues are just $159 billion.
Indeed looking out to 2027, revenues are forecasted to reach $176 billion, suggesting that single-digit growth will be the new normal.
[2[ Home Depot Targeting Professionals
Home Depot knows that homeowners won’t have loose purse strings in the near future as inflation rises and stimulus money evaporates. That doesn’t necessarily mean that the company has run out of opportunities to increase revenues, though.
Consumers represent the bulk of Home Depot’s customers (about 95%). Professionals, such as electricians, plumbers, and construction contractors only make up about 5% of the company’s customers.
Despite that small percentage, professionals make up about 50% of Home Depot’s sales. In this respect, Home Depot does considerably better than its top rival, Lowe’s. About 20-25% of Lowe’s revenues come from professionals.
Home Depot plans to add a wider merchandise mix that will ensure professionals can acquire the quantities they need. The CEO mentioned that historically a professional might simply pop into a store to fix a broken blade but now will consider millwork too.
Time To Buy Home Depot?
As people have less time to commit to home improvement projects, Home Depot – which serves retail buyers primarily – will see a slowdown in top line sales growth. Home Depot’s revenues will probably grow at single digit rates at best.
Management has a plan to re-ignite growth by bringing more professional contractors to Home Depot to help “stop the bleeding.” But even if that were to happen, the most optimistic investor can only expect a slight lift.
So, what does all of this mean regarding Home Depot stock?
The future is bleak for shareholders expecting a pop in share price but remains bright for dividend investors who are attracted to the consistent and growing dividend. They can expect the company to continue distributing strong dividends. Just don’t expect the heyday of 2021 when it comes to share price appreciation.
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