At current prices, Dow bellwether Home Depot (HD) is yielding 2.68% in dividends. The $60.7 billion company paid out $0.90 per share, for the third consecutive year in 2009.
The Home Depot (HD) is a home improvement retailer, selling an assortment of building materials, home improvement and lawn and garden products and provides a number of services. The Home Depot stores average approximately 105,000 square feet of enclosed space, with approximately 24,000 additional square feet of outside garden area. The company has 2,244 stores located throughout the United States and Canada, China and Mexico.
Investing in stocks that pay high dividends is an effective way for the conservative investor whose concern is mainly with the preservation of capital. When investing for a high dividend yield, the most important consideration for the investor is the sustainability of such dividends. Hence research into the underlying dividend payer is crucial.
The Home Depot (HD) has been paying dividends since 1981 but has over the last three years come under pressure in producing dividends at the same level. Since raising the dividend 32% in 2008, Home Depot (HD) has kept the dividend at the same level of $0.90. Earnings in 2009 were down 31% on 2007 levels. This has seen the dividend payout ratio increase to 56% of earnings per share, from about 30% in 2007.
However the picture is getting rosier for the retailer, which reported very strong numbers in the latest quarter and raised the quarterly dividend for the first time since 2006. For the fourth quarter of 2009, Home Depot (HD) reported a better-than-expected profit, citing improved demand for kitchen, bath, and paint and flooring products. The company also reported its first same-store sales gain in almost four years. The company is also planning to buy back shares this year as it expects to generate excess cash.
On a valuation basis the company is trading on a price to sales ratio of 0.9 and a price to cash flow of 13.79 times. The PE ratio is somewhat high at 22 times but is in line with the industry average on a forward basis. Home Depot (HD) is a good indicator of the economy itself, and the upbeat earnings outlook bodes well not just for dividends but for the economy as a whole.
Since 2006 the dividend has increased 125%, despite the three years of constant dividends. Given the rosy outlook and the increase in the quarterly dividend for the first time since 2006, it’s likely investor’s will obtain a higher yield than the current 2.68% on offer, especially if the dividend is raised as expected.
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