Monday morning, I wrote to you. I explained just how a nervous Home Depot (HD) shareholder might prepare ahead of time for Tuesday morning's Q4 earnings release. Timely piece. No, I can't always do that. What I can do is tell you why I like Home Depot so much. I worked there in the wake of the financial crisis. Like nearly everyone across the financial services industry, I have been punched in the mouth a few times. I drove a forklift for them at my local store. That was kind of fun. You find that shocking? What I found shocking once I started, remember this was a few years ago... was that nearly everyone in the store was a professional at something that had lost their job. What that store offered me was a flexible schedule... so that I could trade all day, while building my own business. This experience taught me to never, ever, rely on someone else to employ my silly self ever again.
The firm also offered even low level employees such "unheard ofs" as healthcare coverage, and an equity accumulation plan. In short, if one is going to get hit in the teeth, I found that firm to be a great place to land. In fact, I liked working there so much that I even tried to hang on part-time for a bit once I had re-established myself on Wall Street. That was not really feasible as my current job takes up 16 to 17 hours a day, and I do like having Saturdays off, but I won't forget, when Wall Street had forsaken me, that these guys were there.
The Fourth Quarter
HD reported EPS of $2.25 on revenue of $26.49 billion. The revenue print showed year over year growth of 10.9%. This was below expectations. Comp store sales were strong enough, stronger in the U.S. than abroad. That's a positive. Now it gets tough. The firm guides full year guidance for sales as well as diluted EPS below industry consensus. What the firm did for shareholders is increase plans to return capital. A new quarterly dividend of $1.36 was announced, payable to shareholders of record this March 14th. That's up from $1.03, and brings the forward yield up to 2.86%.
Long-term investors can consider that. A quarterly payment of $1.36 adds up to annual payments of $5.44. That's a nice chunk reduced straight from net basis every single year that an investor may not think of. Home Depot also announced a new $15 billion share repurchase authorization that will replace the old program. Is that a solid for traders? Yes. In fact, it's about 7% of the entire company. As a purist, it does bother me some that the firm had less than $1.8 billion in cash and equivalents on the balance sheet as of February 3rd. That's approximately half of what the firm reported for that line the year prior.
This is the same chart that I analyzed for you on Monday, one day later. Clearly, now the Pitchfork is broken. The 61.8% retracement level has become law. If the 50% level ($186-ish) is not re-taken, the $179 level could be in play. Monday's trading example in Market Recon suggested purchasing $190 puts that expire this Friday, while selling $182.50 puts (same expiration) for a net debit of $1.54. If implemented, the trade would be handsomely profitable this morning. I would cover the options trades at these levels before they have a chance to turn against if one has not yet done so.
Where to add now, if one is enticed to do so, based on the attractive plans to return some dough to the folks? I'll wait til you read this, so I do not front-run my own article. If still below $184, I likely add a few today, and leave some powder dry for that $179 spot. I would think that at that time, I will sell May $190 calls against for a rough $3.35. Just an idea from a guy who's used to fighting for his meals.