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

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

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

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!