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Home Depot’s Capitalization Policies in 2Q16

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Dividend yield

The Home Depot (HD) paid out $1.5 billion by way of dividends in the first two quarters of fiscal 2016. The company has paid out ~39.6% of its earnings as dividends over the past 12 months. That compares to a dividend payout ratio of 40.8% for the Dow Jones Industrial Average (DIA), 48.5% for the S&P 500 Index (SPY) (IVV) (VOO), and 40.2% for the S&P 500 Consumer Discretionary Sector Index (XLY) (VCR) (FXD).

HD stock has a dividend yield of 1.8%. This compares to 1.3% for Lowe’s (LOW), 2.3% for Pier 1 Imports (PIR), and 1.5% for Williams-Sonoma (WSM) as of August 19.

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Share repurchases

The Home Depot (HD) repurchased shares worth ~$2 billion in 2Q16, taking the total in the current fiscal year to $3.1 billion. The company plans to spend up to $7 billion to repurchase its own stock in the current fiscal year, which is the same as last year.

As a result of its propensity to provide value to shareholders by stock repurchases, HD is the top holding in the PowerShares Buyback Achievers ETF (PKW), with 5.3% of the portfolio’s weight invested in the company.

Increasing external debt

HD has financed its share repurchase program, partly from internally generated cash and partly by increasing external debt. This has improved return metrics for shareholders. Total debt has increased from $16.7 billion in 2Q15 to $19.4 billion in 2Q16.

Acquisitions for The Home Depot have been few and far between, as the company looks to grow sales organically. However, on July 22, 2015, HD announced it was acquiring Interline Brands for $1.6 billion in an all-cash deal. HD is planning to finance the Interline Brands purchase by taking recourse to debt markets, according to comments by Carol Tome, The Home Depot’s CFO (chief financial officer).

With an investment-grade credit rating and strong cash flow generating ability, the company will likely benefit from the added leverage, although the added debt will affect leverage ratios in the short term.

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