Portfolio Update
The FiveTwenty portfolio received $146.25 in dividends in the past week. ABBV, CAT, and PG paid their quarterly dividend during the week.
| Past Week Dividend | $146.25 |
| Current Quarter Dividend (Q3 2022) | $530.84 |
| LifeTime Dividend | $5,138.00 |
| Estimated Annual Dividend | $6,169.92 |
The capital allocation for the week of 08/21/2022 to 08/27/2022 will be used to establish a position in Home Depot (NYSE: HD).
HD – Company Profile
The Home Depot (HD) is a multinational home improvement retailer that sells tools, construction materials, appliances and services. The company employs about 500,000 associates across its 2,316 stores in the US, Canada and Mexico. Official Site | Wikipedia
| Dividend Streak | 13 years |
| Yield | 2.18% (FWD 2.34%) |
| Payout Ratio | 43.64%1 |
| P/E | 19.751 |
1 computed using TTM EPS of $16.27 as of Q2 2022
Financials
Does HD have the financial means to sustain and raise its dividend going forward?
Over the last decade, HD has seen impressive revenue and earnings growth. Revenues grew from $74.8 billion in 2012 to $151.2 billion in 2021, a CAGR of 8.13%. During the same period earnings increased from $4.5 billion in 2012 to $16.4 billion in 2021, a CAGR of 15.45%. The ability of the company to grow earnings at a faster rate than revenues bodes well for its future growth prospects.
In the last 10 years, HD has managed to consistently grow EPS from $3.00 in 2012 to $15.52 in 2021. This represents an impressive CAGR of about 20% and is a faster growth rate than both the rates at which revenues and earnings have grown.
The average dividend per share growth rate was 21.60% per year in the past 10 years and 17% per year in the past 3 years. (per GuruFocus) The dividend growth rate is especially impressive given that it has not been accompanied by a significant increase in the payout ratio. HD has been able to maintain a payout ratio of between 38% to 54% with the current payout ratio at just about 43.64%.
FY 2022 earning
Due to a unprecedented high demand for home improvement projects during the COVID-19 pandemic, HD reported exceptional financial results in FY 2020 and FY 2021. Revenues and EPS grew 19.9% and 16.5% respectively in 2020, and 14.4% and 30.1% respectively in 2021.
For the first 6-mo of FY 2022, revenues and EPS are still growing at a healthy clip. Revenues grew 5.2% and EPS were 8.9% higher. Furthermore, as part of the Q2 2022 earnings report, HD reaffirmed its full year guidance slightly higher. The company expect sales growth of approximately 3% and EPS growth in the mid-single digits.
In addition, on 8/18/2020 HD declared a dividend of $1.90 per share payable on 09/15/2022 to share holders of record on the close of business on 09/01/2022. It also announced a $15 billion share repurchase program.
Valuation
Are we paying too much for HD at the current share price?
In the last 10 years, HD’s P/E ratio saw a low of 14.62 and a high of 28.47, with a median value of 22.37. (per GuruFocus) The current TTM P/E ratio of 19.75 is below the historical median.
The current share price of $321.32 is 9% above the 50-day moving average and 3.6% below the 200-day moving average. Additionally, the share price is near the 40th percentile of the 52 week trading range.
Yield
How does the current dividend yield for HD compare to historical values?
In the last 10 years, the dividend yield for HD has been in a range of 1.55% to 3.58%, with a median of 1.98%. The current TTM yield of 2.18% is materially above the historical median value. The MRD yield of 2.32% offers an even higher premium over the historical median.
The valuation on yield for HD looks attractive compared to historical values for the last 10 years.
Thesis
Why are we adding HD to the FiveTwenty portfolio?
HD is the largest home improvement retailer in North America. Since the great recession in 2008 -2009, the company has had an impressive streak of growing revenues, earnings and dividends.
While the company might experience some short term headwinds if a recession materializes in the US, in the long term we expect the company to continue to benefit from the US housing market dynamics. Additionally, the 44% current payout ratio should provide a margin of safety for the dividend to allow the HD to navigate any short term turbulence.
Additional Research
Photo by Oxana Melis on Unsplash
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