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Home Depot Dividends a Notch Above Lowe’s

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Shareholder payouts from Home Depot

Home Depot (HD) has a strong history of returning cash to shareholders. Since 2012, the company has spent ~$53 billion on dividends and share buybacks. Dividend per share has grown at a CAGR (compound annual growth rate) of ~11% over the period between fiscal 2008 and 2015. In fiscal 2015, the company paid $1.88 per share in dividends, an increase of 21% year-over-year. This was also the sixth straight year of dividend increases for the company.

Home Depot (HD) repurchased shares worth $7 billion in fiscal 2015. The company also announced a new share repurchase authorization plan valued at $18 billion.

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Importance of dividends

A regular dividend stream has the advantage of smoothing returns volatility for shareholders. As you can see in the chart above, HD raised its payout during the recession to smooth payments to shareholders. This is important for investors as the home improvement industry tends to be highly cyclical depending on the performance of the economy and other macro factors. Read Parts 17 to 20 for more on these key variables.

Peer group comparison

At 39.6%, HD’s dividend payout ratio is the second highest in its peer group. It trumps that of the overall consumer discretionary sector (XLY), the Dow Jones Industrial Average (DIA), and fellow home improvement (ITB) (XHB) retail chain Lowe’s (LOW). Specialty retailer Williams-Sonoma (WSM) has a higher payout ratio of 40.6%. So does the overall S&P 500 Index (SPY).

LOW is, in fact, a dividend aristocrat, one of a select group of S&P 500 Index companies that have raised dividends 25 years in a row. It makes up 0.7% of the SPDR S&P Dividend ETF (SDY).

While HD falls short of being a dividend aristocrat, it beats LOW on two counts:

  • its dividend yield is 1.6% compared to Lowe’s 1.2%
  • its dividend payout ratio is 39.6% compared to Lowe’s 32%

Outlook

Home Depot plans to raise its dividend payout ratio to $2.36 in fiscal 2016, an increase of 25.5% over last year. Going forward, HD targets a long-term payout ratio of 50%. It intends to use surplus cash to repurchase shares. It also plans to repurchase $18 billion worth of shares by 2018, beginning with $4.5 billion this fiscal.

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