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Home improvement retailer Home Depot Inc (NYSE: HD ) has seen its share price rise 4% over the past month after the firm's fourth-quarter results gave investors reason to believe HD stock is headed even higher. Although many believe that Home Depot stock could go higher in the year to come, the company is not really a growth play. Instead, investors should look at the stock as an income investment.
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HD stock has had a pretty good year so far, and with the firm's share price up more than 9% since the start of January and the company's price-to-earnings ratio sitting at 23, you may be skeptical about buying while the firm is on a high.
However, there are a lot of good reasons to consider HD stock right now, especially if you're an income investor.
HD Stock: Management Is Generous
One of the biggest reasons to own a stock as an income investor is the company's management. Firms that are doing well but don't share their influx of cash with investors are useless to traders on the hunt for a great dividend.
Home Depot has proven itself to be the exact opposite of that - it has consistently raised its dividend for the last seven years. Not only that, but HD management upped its target payout ratio to 55% and announced a 20% dividend increase back in February.
This should matter to income investors because it proves that the company is committed to providing the best yield it can and it is returning value to shareholders. None of the rest of the reasons to buy HD stock really matter if management isn't willing to be generous, and in Home Depot's case, they are.
HD's capital allocation decisions are rare for the industry as well. When it comes to the retail sector, only a handful of other companies are willing to pass on more than 50% of their earnings to investors. By contrast, competitor Lowe's Companies, Inc. (NYSE: LOW ) pays out just over 30% to its investors.
Home Depot Sales Still Improving
Home Depot just released a stellar earnings report in February and it certainly painted a bright future for the brand. The company is expecting to see sales and profits rise throughout the coming year, helped by economic tailwinds as the housing market continues to recover. The home improvement industry has been enjoying a revival and annual spending in this sector is seen continuing to rise toward $900 billion.
These factors are great news for Home Depot and its investors because it gives HD stock a clear advantage over the rest of the retail industry. A pullback in consumer spending has hurt retailers like Macy's Inc (NYSE: M ), but Home Depot and the DIY industry appears to be relatively insulated from that trend.
Rising sales and rising profits are paramount for income investors, because it means that management will have more cash on hand to divvy up among shareholders.
Home Depot Stock: Changing With the Times
Not only has Home Depot managed to thrive while fellow retailers struggle to stay afloat, but the company has been able to remain relevant even as the retail industry undergoes a massive shift toward e-commerce.
On one hand, HD is killing it in the online space. Unlike many other retailers, Home Depot has made e-commerce work to its advantage and its online sales have become a major source of growth for the company. The firm's online business expanded by 19% last year, proving that HD has a handle on how to improve its online presence.
Whats more is the fact that online sales represent just 5.9% of total sales, so there is still a lot of room for growth in this arena and it could potentially add to HD's revenue in a big way.
On the other hand, Home Depot doesn't really need online sales the way a retailer like Wal-Mart Stores Inc (NYSE: WMT ) or Macy's might. Home improvement customers still want to visit the store. Nearly 50% of all Home Depot's online customers still visit the store before buying . That opens up several possibilities for HD management to grow both in-store and online sales together rather than just worrying about competing with e-commerce giant Amazon.com, Inc. (NASDAQ: AMZN ) like many of its peers.
The Bottom Line
HD stock isn't going to catapult sky-high anytime soon, but the firm is still a great buy for income investors. Home Depot has a bright future that shareholders will get to enjoy through management's capital allocation decisions.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
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