Ever step onto the cement floors at your local Home Depot (HD) , and just stop to smell the smell of the place? Of course you have. Ever walk into a candy store as a kid, and just stop to smell the place? Yeah, that's what I'm talking about. I don't know about most folks, but for me, suddenly realizing when working on a project at home or in my yard that I need something that I do not have but they do sell at my Home Depot, well that's kind of a thrill. Chances are that I will ultimately walk out of that store with more than I intended to purchase when I walked in. In addition, accomplishing something around one's home increases confidence, and provokes future similar type adventures.
In fact, I like Home Depot so much that I have even moonlighted in their lumber and building materials section at times in my career when Wall Street has struggled, and for two reasons. One, to earn some extra dough, and two, to learn how to do things that would cost more if I hired someone else to do it. What I found out during the financial crisis was that nearly every guy working in that store was a professional in some other occupational field. Oh, one other nice thing to say about Home Depot. This is a great employer for active military reservists. Never a complaint when one is called upon to serve. That's not true everywhere. I often preach to investors that they should never fall in love with their stocks because your stocks will never love you back. I will trade in and out of Home Depot (right now, I am long the shares), but this name is arguably as close as I will come to breaking my own rule.
Home Depot Reports
For the firm's fiscal (2020) fourth quarter, which ended February 2nd, the firm reported EPS of $2.28, crushing estimates of roughly $2.10. Home Depot did this on revenue of $25.78 billion, which was virtually in line with expectations, and actually down 2.7% year over year. They beat came by virtue of better than expected margin performance. Though gross margin actually declined year over year, both gross margin (33.9%) and operating margin (13.2%) printed above consensus view.
Digging deeper, there are some hits and some misses within these numbers. Comp sales for the quarter increased 5.2% (5.3% in the U.S.), well above expectations of 4.8%. That said, the number of transactions printed in serious decline, -6.4%. To counter that, the average ticket increased substantially, by 4.1%. Sales per square foot increased 2.8% to $425.70 from $414.17 for Q4 2018.
The firm also announced an increase to the quarter dividend from $1.36 to $1.50. This quarter the dividend will be payable on March 26th to shareholders of record on March 12th. At the last sale that I see of 243.20, the new dividend yields 2.46%, which almost puts HD on my dividend list. Still pays a heck of a lot more than U.S. Treasury securities.
The guidance on Tuesday morning was to be highly focused upon after Home Depot had twice reduced forecasts in 2019, including a reduction to projected FY 2020 sales as recently as this past December. The firm reiterated its projected revenue growth for FY 2021 to be in the already established range of 3.5% to 4%. For your information, the street is currently at growth of 4.1% here. The firm also guides full year EPS to a range of $10.45, shy of consensus view of $10.51. The guidance is not great. The point is that the firm stuck to prior guidance, oh and the dividend increase.
What I'm Going To Do
I have substantial profits in this name that I need to protect. This is how I am going to try to do it. I would not be surprised to see the name sell off in this weak tape after all of the post earnings hype wears off. I am going to sell my shares once this piece hits publication. Hopefully I get something in the neighborhood of $243 for the shares.
That said, I do want the buck and a half dividend, so I need to be shareholder of record on March 12th. I'm likely to sell (write) March 6th $232.50 puts for a rough $1.30. That's just a week and a half away. What happens if the shares are pressured between now and then, and approach their 50 day SMA, I'll get tagged, and buy the shares back at $232.50 less the $1.30 premium paid for the puts, and less the $1.50 dividend. My net basis would be $229.70.
Even if I am forced to pay up for the shares in order to get them back for the dividend, I will still be able to subtract the same $2.80 from my net basis. The shares go ex-div on March 11th. You dig?