The housing rebound continues to be very, very good to Home Depot (HD). Same store sales in the U.S. rose 11.4% in Home Depot’s fiscal second quarter. At a time when many S&P 500 companies are scrambling to come up with more than 2% revenue growth, Home Depot reported a near 10% rise in revenue.
Chief financial officer Frank Blake made an obvious nod to the recovering housing market as a driver of the better-than-expected quarterly results, and the company’s decision to raise full year earnings per share guidance to $3.60, which would be about a 20% increase.
Management also made a point of calling out the impact of its aggressive share repurchase program. From the second quarter earnings report: “This earnings-per-share guidance includes the benefit of the Company’s year-to-date share repurchases totaling $4.3 billion and the Company’s intent to repurchase $2.2 billion of additional shares over the remainder of the year.”
Earlier this year management announced an open-ended authorization of up to $17 billion for stock buybacks.
As previously covered at YCharts, share repurchases can be a very smart capital allocation strategy…at the right price.
Right now, however, it’s hard to make the case that Home Depot is buying back at a low price. Morningstar’s fair value estimate is $72 per share, about 4% lower than Home Depot’s recent price. Home Depot’s trailing and forward PE ratios are at their 10-year high.
A higher multiple can be more than justified if there’s commensurate growth expectations. Yet as the Wall Street Journal points out, in 2007 Home Depot’s 10-year annualized revenue growth rate was 12.3%, nearly triple the projected 4.2% rate from 2009 to 2014.
As this chart shows, Home Depot wasn’t buying back much during the 2008 and 2009 lows, but the pace has picked up since 2011, during a stretch when the stock has more than doubled.
Another way to visualize Home Depot’s buyback-higher approach is to call up its shares outstanding metric:
While management is focused on repurchasing shares at the corporate level, there hasn’t been much in the way of insider buying of late. Year to date the only listed insider purchase was for 1,000 shares. Insiders have sold 369,000 shares in 2013.
Home Depot has also been aggressive in its dividend payout strategy. In February it announced a 34% dividend increase. The dividend growth makes up for a relatively low dividend yield. Over the past five years the dividend has increased more than 70%.
There’s room for more increases as the current 39% dividend payout ratio is below management’s stated 50% target, and free cash flow has more than tripled since the recession. From a shareholder’s point of view, returning capital through dividends rather than share repurchases looks like the savvier move these days.
Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at firstname.lastname@example.org. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.
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