Is It Smart To Buy The Home Depot, Inc. (NYSE:HD) Before It Goes Ex-Dividend?

By
Simply Wall St
Published
August 28, 2020
NYSE:HD

It looks like The Home Depot, Inc. (NYSE:HD) is about to go ex-dividend in the next four days. You will need to purchase shares before the 2nd of September to receive the dividend, which will be paid on the 17th of September.

Home Depot's next dividend payment will be US$1.50 per share, and in the last 12 months, the company paid a total of US$6.00 per share. Calculating the last year's worth of payments shows that Home Depot has a trailing yield of 2.1% on the current share price of $288.63. 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 check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Home Depot

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Home Depot paid out 54% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether Home Depot generated enough free cash flow to afford its dividend. It distributed 35% of its free cash flow as dividends, a comfortable payout level for most companies.

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.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

historic-dividend
NYSE:HD Historic Dividend August 28th 2020

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. For this reason, we're glad to see Home Depot's earnings per share have risen 18% per annum over the last five years. Home Depot is paying out a bit over half its earnings, which suggests the company is striking a balance between reinvesting in growth, and paying dividends. This is a reasonable combination that could hint at some further dividend increases in the future.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Home Depot has delivered an average of 20% per year annual increase in its dividend, based on the past 10 years of dividend payments. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.

The Bottom Line

Is Home Depot worth buying for its dividend? Home Depot's growing earnings per share and conservative payout ratios make for a decent combination. We also like that it paid out a lower percentage of its cash flow. Overall we think this is an attractive combination and worthy of further research.

On that note, you'll want to research what risks Home Depot is facing. Our analysis shows 1 warning sign for Home Depot and you should be aware of it before buying any shares.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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