Is Home Depot Stock a Buy?

Home Depot's (NYSE: HD) stock is enjoying a long run of stellar performance, moving higher by about 790% over the previous 10 years alone. However, the stock's sell-off in February and March as the coronavirus pandemic overtook the country handed the stock its largest decline since the financial crisis.

While shareholders who were able to hold on have recovered their losses and then some, they may be wondering where Home Depot will go next. With no end in sight to the contagion, investors have to decide whether the stock still offers value under current conditions.

A hand holding up a smartphone in the lumber section of a home-improvement store

Image source: Getty Images.

Home Depot and COVID-19

Despite the pandemic, Home Depot has held up fairly well. In the first quarter, net sales increased by 7.1% -- and these numbers cover the period between Feb. 3 and May 3. This means that COVID-19 affected approximately half of the quarter. Investors have noticed, sending the stock up almost 15% in the first half of the year -- better than the S&P 500 and archrival Lowe's.

Still, this does not mean the company was immune from the pandemic. Diluted earnings per share fell by 8.4%. Like most retailers, it spent more time on cleaning and restocking essential items. It also spent more heavily on expanded paid time off, overtime pay, and the extension of dependent care benefits. This resulted in an $850 million pre-tax charge, constituting a hit to earnings of $0.60 per diluted share.

Nonetheless, the company is benefiting from years of investment in its One Home Depot strategy, which integrates online and physical store shopping. In the most recentearnings call CEO Craig Menear credited this plan for allowing the company to adapt so quickly to the pandemic-driven changes.

Home Depot's financials

Due to the turbulent business environment, analysts forecast an earnings decline of 1.6% for this year. The falling profits have taken the company's forward P/E ratio to around 25.

Still, in the first quarter, comparable sales increased by 6.4%. This includes a 7.5% rise in comparable sales coming from its U.S. stores.

Moreover, the recent turmoil should not endanger the integrity of the dividend. This year's dividend increase takes the payout to $6 per share, giving Home Depot stock a yield of about 2.3%. Management also credited what it calls "solid results" when it mentioned the board's declaration of this payout.

Home Depot has also kept the dividend payout ratio -- the percentage of net income paid out in dividends -- at a sustainable level. At a payout ratio of about 55%, the dividend not only appears safe, but it also should leave room for further payout hikes. As of this year, stockholders have seen 10 consecutive years of dividend increases. 

Should you buy?

Dividends are not the only reason for optimism. Analysts have stuck to a brighter outlook for the next fiscal year. For now, they expect 10.6% profit growth, which would recoup much of the losses from this year.

Additionally, the company holds about $8.7 billion in cash. With Home Depot remaining cash flow positive, investors should expect the company to remain stable.

Still, despite these accolades, investors may want to temper their expectations. The stock price has currently risen above pre-pandemic levels. Moreover, given the near-term forecasts on profits, Home Depot appears headed for single-digit earnings growth.

These concerns do not change the fact that Home Depot is a long-term winner. Nonetheless, at current prices, prospective stockholders will pay almost 25 times forward earnings for relatively low growth. Stockholders can see gains under these conditions, but they should not expect outsized returns.

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Will Healy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Home Depot. The Motley Fool recommends Lowe's and recommends the following options: long January 2021 $120 calls on Home Depot and short January 2021 $210 calls on Home Depot. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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