Home Depot Stock Climbs Despite Weak Earnings and Guidance

Home Depot (NYSE: HD) saw its stock rise 2.8% on Tuesday, even after revealing disappointing results for fiscal 2024 and cautious guidance for fiscal 2025.

Alongside its performance report, Home Depot announced a modest 2.2% increase in its dividend. This marked the smallest dividend hike since the company began increasing its payout back in 2010.

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Despite the lackluster results, Dow Jones Industrial Average component Home Depot still appears to hold value for investors amid what promises to be another challenging year for earnings growth.

Image source: Getty Images.

Concerns Over Dividend Growth

Home Depot has seen robust growth in dividends and earnings over the past 15 years, a trend reflected in its stock price.

HD data by YCharts

Despite a slowdown in earnings growth recently, Home Depot had previously announced notable dividend increases, such as 7.7% in 2024, 10% in 2023, and 15.2% in 2022. However, the latest increase of 2.2% signifies a significant change and mirrors the extent of the company’s ongoing challenges.

Due to its stagnant earnings growth in the past few years, Home Depot’s payout ratio rose to 60%. This figure is still sustainable for a strong industry player, but it exceeds the company’s historical average over the last 15 years.

HD Payout Ratio data by YCharts

Given the circumstances, a small dividend raise may be prudent, helping to control expenses. A lower payout ratio allows Home Depot to align dividend growth with earnings recovery. For instance, as earnings grow by 10%, the dividend could be increased by the same percentage without raising the payout ratio further.

Weak Sales Outlook

Home Depot management is known for its straightforward communications during earnings calls. Currently, they anticipate only 2.8% total sales growth for fiscal 2025, alongside a mere 1% growth in comparable sales. In fiscal 2024, reporting included an additional week of sales that may skew comparisons.

Projected diluted earnings per share (EPS) are set to decline by 3%, with adjusted diluted EPS expected to decrease by 2%.

To provide context, Home Depot’s diluted EPS was $14.91 in fiscal 2024, compared to $15.11 in fiscal 2023 and $16.69 in fiscal 2022. These numbers indicate that earnings in fiscal 2025 may drop below levels recorded four years ago. The earlier pandemic boosted demand, creating an unsustainable spike in earnings, compounding investor concerns about the stagnation extending into its fourth year.

Long-Term Strategy Remains Key

Considering Home Depot’s stagnated growth and projected earnings declines, one might question the stock’s resilience. The key to understanding lies in distinguishing the company from its stock valuation.

The company’s challenges do not stem from management deficiencies but rather from broader market conditions. An industry-wide decline in consumer spending, impacted by high interest rates, elevated mortgage rates, significant credit card debt, and high housing costs has slowed growth.

Despite these hurdles, Home Depot’s operational strength remains. Although current results lack robust growth, they are not experiencing a dramatic decline either. Long-term investors may choose to ride out the cyclical downturn, secured by a dividend yield of 2.3%, while anticipating eventual industry recovery and positioning for when growth resumes.

Guided by fiscal 2025 indications, Home Depot expects to achieve adjusted diluted EPS of $14.94, translating to a forward price-to-earnings ratio of 26.3 at the current stock price. This assessment reflects a valuation on the higher end, even for a reputable dividend stock like Home Depot.

Investment Outlook: Buy and Hold Strategy

While value investors might explore alternatives to Home Depot for dividend stocks, those prepared to pay a premium for quality may still find this stock appealing.

Home Depot’s ongoing investments position it well for future growth rebounds. The company notably acquired SRS Distribution for $18.25 billion, targeting professional clients and contractors, while also planning to open 13 new stores during fiscal 2025.

In summary, Home Depot upholds its commitment to long-term growth, despite current economic challenges. As the impacts of these investments become apparent, there is potential for the company to thrive during the next upturn.

Ultimately, Home Depot remains a viable option for investors who are willing to endure the current slowdown within the home improvement sector.

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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.

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