Dow Spotlight Stock of the Week: The Home Depot, Inc. (HD)

In 2012, do-it-yourself home-improvement giant The Home Depot Inc. (NYSE:HD) ended the year as one of the Dow Jones Industrial Average‘s top-performing stocks. Shares rose by 47% in 2012, making it the second best Dow component while the index itself added only 7.26% during the year.

The Home Depot, Inc. (NYSE:HD)Thus far in 2013, the Dow is up 7.25% and once again Home Depot is outperforming the index, as shares have risen another 11.61% year to date. Currently, The Home Depot Inc. (NYSE:HD) is the fifth best component. The company has also easily outperformed its closest competitor, Lowe’s Companies, Inc. (NYSE:LOW) , both in 2012 and thus far in 2013. One Fool believes that Home Depot is a better stock than Lowe’s but that at their current stock prices of $69.03 and $38.38, respectively, both companies are a little pricey.

That leads me to the question investors who currently don’t hold shares of Home Depot are asking: Is now the time to buy?

Share-buyback program
Home Depot’s board members certainly believe the answer is yes. In conjunction with the company’s earnings report this past Tuesday, it was announced that the board of directors authorized a $17 billion share-repurchase program, which will replace the previous authorization amount.

Over the past 10 years, the company has spent more than $37.5 billion repurchasing approximately 1 billion shares. Given the current stock price, it’s clear to see now that at an average share repurchase price of $37.50, the past programs were a success and created value for long-term shareholders. But in 2007, when the company announced an unprecedented repurchase program authorized to spend $22.5 billion, a number of investors and analysts questioned the decision.

This most recent $17 billion program has been met with little resistance from shareholders who would normally oppose such a program. Income-oriented investors typically argue that a larger dividend payment would be a better idea. But The Home Depot Inc. (NYSE:HD) cut that argument off before it began by also announcing a 34% dividend increase on Tuesday.

Another demographic of shareholders would argue that the funds would be better used by growing the business through reinvestment, and in this case that would come from opening new stores. In the fourth-quarter earnings release this past week, management said it plans to open nine new stores. However, the company is also facing limited growth opportunities around the world. Home Depot closed its seven stores in China in 2012 because of cultural differences. And those culture clashes may come into play with other nationalities throughout the world.

On one hand
With the company limited on where it can invest to spur growth and already consistently increasing the dividend, the next logical place to deploy cash would be in repurchasing stock, right? Perhaps not.

Currently, The Home Depot Inc. (NYSE:HD) has a cash pile of $2.49 billion while its debt load is $10.8 billion. If the company were to cut its repurchase program down to $7 billion and spend the rest on becoming debt-free, long-term investors may be better off.

On the other hand …
The company’s 2013 projected growth rate is only 14.1%. At Home Depot’s current share price of $69.03, the $17 billion will buy slightly more than 246 million shares and reduce the total count by more than 16%. A share reduction of this magnitude will have a astonishingly positive effect on future metrics for the company.

For example, the earnings report on Tuesday indicated that fourth-quarter net profit was $1 billion, and after dividing that by the current 1.49 billion outstanding shares, the company announced earnings per share of $0.68. If we take the 16% share reduction into account, we now have 1.24 billion shares, and the same $1 billion in net earnings would convert to earnings per share of $0.80.

Final thoughts
That’s a hypothetical example, since there are a million other moving parts that would factor into company earnings and how many shares the $17 billion will actually buy. I believe debt-free companies have a better chance of creating long-term value for shareholders, and I would rather see Home Depot spend at least some of the $17 billion on reducing its debt.

Over the past 10 years, though, Home Depot’s board has added more value to shareholders by reducing share count instead of debt. So while I don’t love the idea of this program, I am not against it.

Finally, to answer whether the stock is a buy, I will just say this: I am going to follow the lead of The Home Depot Inc. (NYSE:HD)’s board of directors and purchase a few shares in the near future.

The article Dow Spotlight Stock of the Week: Home Depot originally appeared on Fool.com.

Check back daily as Matt gives the run-down on the Dow’s winners and losers of the day or follow him on Twitter: @mthalman5513. Fool contributor Matt Thalman has no position in any stocks mentioned. The Motley Fool recommends Home Depot and Lowe’s.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The 10 Laziest Countries in the World

The 10 Most Polluted Countries in the World

The 10 Most Dangerous Cities in America 2014

The Top 10 Gold Producing Countries in the World

The 10 Tallest Buildings in the World

The 10 Richest Stand Up Comedians in the World

The 10 Fattest Countries in the World

The 5 Best Summer Jobs for Teens

The 10 Most Religious Countries in the World Keeping the Faith

The 10 Most Educated Countries in the World

The 10 Most Popular Cell Phones in the World

The 10 Drunkest Countries in the World

The 10 Most Expensive Private Schools in the World

The 10 Smallest Countries in the World

Walking Dead Season 5 Spoilers You’ll Wish You Didn’t Know

The 10 Poorest Countries in the World

The 10 Greenest Countries in the World

The Top 10 Countries with the Highest Population in the World

The 10 Most Visited Countries in the World

The Top 10 Star Wars Characters in the Iconic Series

The 10 Most Expensive Android Phones in the World

5 Reasons Why The Illuminati Is Real and a Threat to Society

The 6 Scariest Halloween Costumes Ever Screamed At

The 4 Biggest Hedge Fund Managers in the World Today

The 15 Most Densely Populated Countries in the World

The 10 Biggest Tea Drinking Countries in the World

Top 6 Ways to Improve Your Checkout Process and Close Sales

The 5 Most Profitable Online Businesses You Can Start Today

The 20 Most Profitable Hospitals in the US

The 5 Most Profitable Home Businesses to Start

The 7 Teams that Will Win the Stanley Cup in 2015

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!