Home Depot: A Safe Haven?

10/28/2015 8:00 am EST

Focus: STOCKS

Chloe Jensen

Chief Analyst, Cabot Dividend Investor

Our latest new recommendation is a high quality, dividend-paying stock that will help insulate our portfolio from market weakness, suggests Chloe Lutts Jensen, editor of Cabot Dividend Investor.

I have been very impressed by the resilient action at Home Depot (HD) and am adding the stock to the Safe Income tier of our model portfolio.

Home Depot is the world’s largest home improvement retailer, with 2,200 stores in the US, Canada, and Mexico.

The stock’s exposure to the cyclical housing market is one concern from a long-term perspective; however, the company has worked hard to become a leaner, better-managed company since the 2006-2011 housing crash, creating a cushion for future downturns.

Far from becoming complacent, as the housing market has improved, Home Depot has used the last few years of plenty to whip the company into the best shape it’s ever been in.

Margins and return on investment have improved every year since 2009 and management is very close to hitting its best-in-class operating margin and ROIC targets of 13% and 27%, respectively.

More important from a dividend investing perspective, Home Depot delivers remarkably regular cash flow growth.

Operating income has grown by between 15% and 25% in each year of the past five and analysts expect 15% EPS growth this year and next, supported by revenue growth of between 5% and 6%.

The company has opened three huge new facilities to fulfill online orders in the past year, but plans to open only six new stores in 2015. Online sales still make up only 5% of Home Depot’s business, so the growth potential remains high.

Home Depot has paid dividends regularly since 1987. For the past ten years, the company has increased the dividend by an average of 20% per year and management is now targeting a payout ratio of 50%, up from the 40% of the past few years.

Investors who buy Home Depot today should expect to see a large portion of their return going forward coming from regular dividends as the company continues to mature.

While this isn’t a value stock; rather, the primary attraction of Home Depot today is the stock’s resilience and reliable dividend, which will help insulate our portfolio from market weakness.

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