Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

The Home Depot, Inc. (HD): Does a Massive Share Buyback & a 34 Percent Dividend Boost Make It a Buy?

Page 1 of 2

In February The Home Depot, Inc. (NYSE:HD) announced its full years earnings, with revenue increasing 6.2% to $74.8 billion and earnings increasing 21.5% to $3 per share. Two other significant announcements were made on that day: a 34% increase in the quarterly dividend and a $17 billion share repurchase program expiring at the end of 2015.

A history of returning cash to shareholders

Since 2002 Home Depot has spent $37.5 billion in total on share repurchases, reducing the share count by roughly 1 billion shares. During the same period the company has increased its dividend at an annualized rate of about 20%, growing from $0.21 annually in 2002 to a projected annual payment of $1.56 in 2013.

HD Average Diluted Shrs Outs Annual data by YCharts

The 34% dividend increase puts the current dividend yield at 2.23%, just slightly above the dividend yield of the S&P 500.

Are these buybacks a good idea?

Share buybacks are a good use of cash only if a company’s shares are undervalued. If a company buys back shares that are overpriced then this money is essentially being wasted. The Home Depot, Inc. (NYSE:HD)’s plan to spend $17 billion over the next 3 years on buybacks is an increase in pace over the past decade, but is it reasonable? Here’s a chart of the TTM P/E ratio since 2002.

HD PE Ratio TTM data by YCharts

Home Depot stock is more expensive than it’s been in the last ten years. Even during 2006 and 2007, when the company saw rapid revenue growth to $90 billion per year, the stock was trading with the P/E ratio below 15. Based on the above chart of outstanding shares this is the time period in which a large portion of the buybacks occurred. Now, with a P/E ratio of about 23, the company will be paying a much higher price for its own shares.

The buyback will boost EPS, but with the P/E ratio at an elevated level I don’t expect any real benefit from this program. The company has guided for sales growth of 2% in 2013 and EPS growth, including the effect of the buyback program, of 12%. Paying 23 times earnings for 12% growth after being goosed by the buybacks seems pretty expensive to me. Without the effect of buybacks EPS growth would be more like 8%, making the picture look even worse. Hopefully the company picks its moments and only buys shares when the price gets depressed, but I doubt this will happen. All this money for the buybacks would be better spent on increasing the dividend.

Page 1 of 2
Loading Comments...