Dow Spotlight Stock of the Week: Home Depot
In 2012, do-it-yourself home-improvement giant Home Depot ended the year as one of the Dow Jones Industrial Average's top-performing stocks. Shares rose by 47% in 2012, making it the second best Dow component while the index itself added only 7.26% during the year.
Thus far in 2013, the Dow is up 7.25% and once again Home Depot is outperforming the index, as shares have risen another 11.61% year to date. Currently, Home Depot is the fifth best component. The company has also easily outperformed its closest competitor, Lowe's , both in 2012 and thus far in 2013. One Fool believes that Home Depot is a better stock than Lowe's but that at their current stock prices of $69.03 and $38.38, respectively, both companies are a little pricey.
That leads me to the question investors who currently don't hold shares of Home Depot are asking: Is now the time to buy?
Home Depot's board members certainly believe the answer is yes. In conjunction with the company's earnings report this past Tuesday, it was announced that the board of directors authorized a $17 billion share-repurchase program, which will replace the previous authorization amount.
Over the past 10 years, the company has spent more than $37.5 billion repurchasing approximately 1 billion shares. Given the current stock price, it's clear to see now that at an average share repurchase price of $37.50, the past programs were a success and created value for long-term shareholders. But in 2007, when the company announced an unprecedented repurchase program authorized to spend $22.5 billion, a number of investors and analysts questioned the decision.
This most recent $17 billion program has been met with little resistance from shareholders who would normally oppose such a program. Income-oriented investors typically argue that a larger dividend payment would be a better idea. But Home Depot cut that argument off before it began by also announcing a 34% dividend increase on Tuesday.
Another demographic of shareholders would argue that the funds would be better used by growing the business through reinvestment, and in this case that would come from opening new stores. In the fourth-quarter earnings release this past week, management said it plans to open nine new stores. However, the company is also facing limited growth opportunities around the world. Home Depot closed its seven stores in China in 2012 because of cultural differences. And those culture clashes may come into play with other nationalities throughout the world.
On one hand...
With the company limited on where it can invest to spur growth and already consistently increasing the dividend, the next logical place to deploy cash would be in repurchasing stock, right? Perhaps not.
Currently, Home Depot has a cash pile of $2.49 billion while its debt load is $10.8 billion. If the company were to cut its repurchase program down to $7 billion and spend the rest on becoming debt-free, long-term investors may be better off.
On the other hand ...
The company's 2013 projected growth rate is only 14.1%. At Home Depot's current share price of $69.03, the $17 billion will buy slightly more than 246 million shares and reduce the total count by more than 16%. A share reduction of this magnitude will have a astonishingly positive effect on future metrics for the company.
For example, the earnings report on Tuesday indicated that fourth-quarter net profit was $1 billion, and after dividing that by the current 1.49 billion outstanding shares, the company announced earnings per share of $0.68. If we take the 16% share reduction into account, we now have 1.24 billion shares, and the same $1 billion in net earnings would convert to earnings per share of $0.80.
That's a hypothetical example, since there are a million other moving parts that would factor into company earnings and how many shares the $17 billion will actually buy. I believe debt-free companies have a better chance of creating long-term value for shareholders, and I would rather see Home Depot spend at least some of the $17 billion on reducing its debt.
Over the past 10 years, though, Home Depot's board has added more value to shareholders by reducing share count instead of debt. So while I don't love the idea of this program, I am not against it.
Finally, to answer whether the stock is a buy, I will just say this: I am going to follow the lead of Home Depot's board of directors and purchase a few shares in the near future.
More Foolish insight
The Motley Fool's chief investment officer has selected his No. 1 stock for the next year. Find out which stock it is in the brand-new free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.
The article Dow Spotlight Stock of the Week: Home Depot originally appeared on Fool.com.Check back daily as Matt gives the run-down on the Dow's winners and losers of the day or follow him on Twitter: @mthalman5513. Fool contributor Matt Thalman has no position in any stocks mentioned. The Motley Fool recommends Home Depot and Lowe's. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.