Home Depot(NYSE: HD) is one of just 30 components in the Dow Jones Industrial Average(DJINDICES: ^DJI). Like the majority of Dow stocks, Home Depot is an industry-leading business that pays a dividend, making it a go-to blue chip stock.
But Home Depot has been selling off along with the broader market. At the time of this writing, the stock is down 16% from its all-time high reached just last December.
Here's why the sell-off in the dividend stock is a buying opportunity for long-term investors.
Image source: Getty Images.
The downturn carries on
Home Depot's growth has stalled as high interest rates have hurt consumer spending. The home improvement industry is sensitive to changes in the housing market, which has been fairly slow because housing prices and mortgage rates are both at relatively high levels compared to historical averages over the last decade.
Folks who buy a home must do so at a far higher price, both in terms of the cost of the home and the monthly payments. That leaves even less wiggle room for improvement projects.
In its latest earnings call, Home Depot discussed why the macro environment will remain challenged due to high interest rates and low housing turnover. And while management was upbeat about the resilience of the consumer, its guidance suggests the downturn is far from over -- with total sales growth forecast at just 2.8% and a 2% decline in adjusted diluted earnings per share.
Fiscal 2025 is shaping up to be the third consecutive year of little to no growth at Home Depot. But the company is making the right moves to take market share when conditions improve.
Focusing on the big picture
In June, Home Depot completed its blockbuster $18.25 billion acquisition of SRS Distribution, a building products distributor with various local brands at 760 locations across 47 states at the time of the acquisition. Home Depot has already opened 20 greenfield locations for SRS since the acquisition.
SRS is an investment in professional contractors, diversifying Home Depot's reach in the home improvement and construction markets. Besides providing a sizable additional revenue stream, the company has identified cross-selling opportunities with SRS. For example, nearly every market with SRS' roofing products now uses QuoteCenter, which is Home Depot's platform for real-time pricing and fulfilment options.
Management expects SRS' organic sales to grow by mid-single digits in fiscal 2025 compared to just 1% comparable sales growth for the overall business. Although SRS isn't expected to grow quickly in the near term, it is expected to do comparably better than the rest of Home Depot.
The full impact of SRS likely won't be felt until the next expansion period. So Home Depot's decision to make such a sizable acquisition even during a downturn is a testament to its financial health and willingness to focus on the long game rather than get too caught up in short-term comparisons.
Managing the dividend during a slowdown
Since the company began consistently raising its dividend in 2010, investors have been able to count on sizable increases, which have helped it maintain a solid yield even as the stock price has soared. However, the most recent raise was just 2.2%, the lowest in the last 15 years.
At first glance, the low raise could be viewed as a red flag that Home Depot isn't doing well and therefore isn't confident it can afford a higher dividend expense. But the company is simply trying to be prudent and not make the dividend difficult to manage.
That's why understanding the reasoning behind the SRS acquisition is so important. Investors could benefit more in the long run if management focuses on its operations, including SRS, rather than bloat the dividend.
The home improvement chain has historically commanded a low payout ratio because it has been able to grow earnings at least as fast as the dividend. But because earnings growth has stalled while the company has kept raising the dividend, its payout ratio has risen to a 10-year high of 60.3%. It's still a healthy level for a strong business, but it isn't as secure as what Home Depot had in the past.
A balanced buy for patient investors
Home Depot is a good value and source of passive income with a reasonable 24.3 price-to-earnings ratio and a 2.5% dividend yield. It is also a coiled spring for economic growth for investors who believe in a recovery in the housing market.
Over time, SRS could prove to be a brilliant acquisition by making Home Depot a more diversified business with better exposure to the professional market.
Add it all up, and Home Depot is a great choice for long-term investors willing to look past the weak guidance for the upcoming fiscal year.
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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot. The Motley Fool has a disclosure policy.
