The Home Depot, Inc. (NYSE:HD) is about to trade ex-dividend in the next 4 days. You will need to purchase shares before the 4th of September to receive the dividend, which will be paid on the 19th of September.
Home Depot’s next dividend payment will be US$1.36 per share, and in the last 12 months, the company paid a total of US$5.44 per share. Calculating the last year’s worth of payments shows that Home Depot has a trailing yield of 2.4% on the current share price of $227.32. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Home Depot can afford its dividend, and if the dividend could grow.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Home Depot paid out more than half (51%) of its earnings last year, which is a regular payout ratio for most companies. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Fortunately, it paid out only 48% of its free cash flow in the past year.
It’s positive to see that Home Depot’s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It’s encouraging to see Home Depot has grown its earnings rapidly, up 22% a year for the past five years. The current payout ratio suggests a good balance between rewarding shareholders with dividends, and reinvesting in growth. With a reasonable payout ratio, profits being reinvested, and some earnings growth, Home Depot could have strong prospects for future increases to the dividend.
Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, ten years ago, Home Depot has lifted its dividend by approximately 20% a year on average. It’s exciting to see that both earnings and dividends per share have grown rapidly over the past few years.
To Sum It Up
Is Home Depot worth buying for its dividend? We like Home Depot’s growing earnings per share and the fact that – while its payout ratio is around average – it paid out a lower percentage of its cash flow. Home Depot looks solid on this analysis overall, and we’d definitely consider investigating it more closely.
Ever wonder what the future holds for Home Depot? See what the 30 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
If you’re in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.