There are many investment strategies that can be successful in generating generational wealth if the investor sticks to the strategy no matter what. Whether a person chooses to invest in growth, invest in value, or invest in income depends on their investment goals.
As I strive to create a safe and growing passive income stream, my personal approach to investing is focused on dividend-paying stocks. Leading retailer Home Depot (HD 0.22%) is one of the main assets in my portfolio.
But is it right for you? Let’s take a look at the fundamentals and valuation of stocks to give you the answer to this question.
Another strong figure for Home Depot
Home Depot proved its worth when it reported its stunning first quarter 2022 financial results on May 17th.
The company’s net sales for the quarter were $38.9 billion, up 3.8% from a year earlier. And it confidently beat analysts’ median forecast of $36.8 billion, extending the streak of hitting or breaking analyst consensus to 10 quarters.
The company’s like-for-like sales grew 2.2% year-on-year. According to Executive Vice President Jeff Kinnaird’s opening remarks during the company’s earnings call, 11 of Home Depot’s 14 merchandising departments posted positive reviews for the quarter.
These remarkable results were driven by best-in-class market share among professional contractors, who tend to buy more often and spend more than do-it-yourself clients. This explains why Home Depot’s big offset deals (like over $1,000) were 12.4% higher than last year. Another piece of the puzzle behind the company’s revenue growth was the total number of offices, which increased 0.8% year-on-year to 2,316.
Home Depot recorded diluted earnings per share (EPS) of $4.09 for the quarter, up 6% year-over-year. That beat the average analyst estimate of $3.67, marking the ninth quarter of the last 10 that the company beat the Wall Street consensus.
The company also reduced its outstanding shares by 3.8% last year thanks to its share buyback program.
Impressive dividend growth should continue
Having increased its dividend nearly six times over the past 10 years, Home Depot is a legitimate dividend growth stock. And it looks like the impressive dividend growth will continue in the coming years for two reasons.
First, analysts estimate that the company will deliver 14.6% annual diluted growth per share over the next five years. This will come from a combination of increased sales, increased margins and share repurchases.
Second, Home Depot’s dividend-payout ratio is quite manageable at 43% over the last 12-month period. This should allow the company to increase payouts as earnings rise over the medium term. The low growth rate of the teen annual dividend and a market yield of 2.7% make Home Depot stock particularly attractive for dividends.
The estimate is reasonable
Home Depot appears to be a collection of growth, earnings, and value stocks. The valuation is the icing on the cake and should make a stock attractive to just about any type of investor.
Its forward price-to-earnings (P/E) ratio of 17 is essentially in line with the home improvement industry average of 16.2. Given the undisputed leadership of the company in the industry, this small award is well deserved.