This Dividend Stock's Strong Foundation Will Help It Weather the Market Storm

The U.S. stock market has stumbled out of the gate to begin 2020. The S&P 500 is down 6% year-to-date, as investors worry about the spreading coronavirus and the potential for a global recession. Stocks that are exposed to global economic growth have been hit particularly hard. Even the highest-quality blue chip stocks such as Home Depot are not immune from the recent sell-off. While Home Depot stock is up 7% year-to-date, it is 5% off of its 52-week high. This does not seem like much of a decline, and indeed Home Depot stock has proved resilient, but the best-in-class stocks do not become cheap very often. Home Depot trades at a higher valuation than many of its peers in the retail industry, but its premium is well-deserved. The company continues to register excellent growth. And although the coronavirus could impact profits in the short-term, the long-term growth catalysts remain intact. Bracing for a Hit Since its founding in 1978, Home Depot has grown into a juggernaut home-improvement retailer. Its almost 2,300 stores in the U.S., Canada and Mexico generate annual revenue above $110 billion. The stock has a market capitalization above $250 billion, making it one of the larger companies by market capitalization in the U.S. The company reported excellent fourth-quarter and full-year 2019 financial results on Feb. 25. Total revenue for the fourth quarter came to $25.8 billion, which was in-line with estimates. Home Depot delivered a strong beat on the bottom line, as earnings-per-share of $2.28 came in ahead of expectations by 17 cents per share. For 2019, Home Depot generated net sales of $110.2 billion, up 2% from 2018. Comparable sales, which measures sales at stores open at least one year, grew 3.5%, including 3.8% growth in the United States. Diluted earnings-per-share increased 5.3% to $10.25 for the full year. Looking ahead, Home Depot's first-quarter results may come in weaker than expected, due primarily to an expected hit from the coronavirus. But we believe there are multiple long-term drivers of growth for Home Depot that remain intact, even with a potential negative impact from coronavirus to start 2020. Long-Term Catalysts Remain Intact If the coronavirus results in lower economic activity in the U.S. and around the world, Home Depot would not be immune. Indeed, Home Depot's business model relies on a financially-healthy consumer and positive economic growth. That said, we believe the negative effect of coronavirus would be short-term in nature. The U.S. economy is still expected to grow in 2020, as the labor market and housing markets remain supportive. Plus, the recent emergency rate cut by the Federal Reserve is a positive tailwind for Home Depot, as lower rates are beneficial for the housing market. Lower rates will result in higher mortgage applications, and therefore higher home sales. Moreover, the unemployment rate remains low, and wages are increasing - all of which indicates consumers will continue to shop on home renovations and improvements. Home Depot's future earnings-per-share growth will also be supported by the company's share repurchases. Since Home Depot is highly profitable with strong free cash flow, it can repurchase its own shares to fuel earnings-per-share growth. The company expects to repurchase at least $5 billion of its own shares in 2020. Strong Expected Returns for This Blue-Chip Stock Home Depot stock has enjoyed a tremendous rally over the past decade. Despite its relatively high valuation, especially when compared to the rest of the retail industry, we believe the stock can still generate strong returns in the years ahead. Shares trade for a 2020 price-to-earnings ratio of 22, based on expected earnings-per-share of $10.45 according to the guidance provided by company management. This is admittedly high, particularly while so many other retail stocks sport valuation multiples in the single-digits. But we believe Home Depot's valuation multiple is justified, due to the company's excellent brand, dominance of its market, and high earnings growth. Our fair value estimate for Home Depot stock is a price-to-earnings ratio of 19-times, which is roughly in-line with the 10-year average valuation multiple. While a retracement to this P/E ratio would reduce shareholder returns over the next five years, it would be a small reduction that is more or less equal to the current dividend yield. Therefore, future returns would still be generated by earnings growth of the company, which we estimate to be in the high-single digits. As a result, total shareholder returns over the next five years could be in the high-single digits. Home Depot is also a dividend growth stock. Along with its fourth-quarter earnings results, the company increased its quarterly dividend by 10%. It has increased its dividend for over 10 years in a row, and has now declared 132 consecutive quarterly dividends. Home Depot has a solid forward dividend yield of 2.6%, which is well above the S&P 500 average (currently at 1.9%). The Dow Jones industrial average has been swinging wildly in recent weeks, and even the best blue-chip stocks have been caught in the sell-off. But this is a great time for investors to capitalize on the panic by opportunistically buying the best-in-class U.S. businesses. Home Depot stock still appears to be slightly overvalued, and the shares are likely to remain volatile as long as coronavirus fears persist. Shares are not cheap, and could certainly get cheaper. But a continued drawdown in Home Depot stock would be a buying opportunity, as the company is still expected to generate earnings growth. And, Home Depot has an above-average dividend yield with a high level of dividend growth. Sooner or later, the market sell-off will end, and in the meantime, investors should get their buy lists ready to take advantage of the decline. We believe Home Depot is just such a stock that should be bought on a continued sell-off. (HD is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells it? Learn more now.)

This Dividend Stock's Strong Foundation Will Help It Weather the Market Storm

Even high-quality blue chip stock Home Depot is not immune to the recent sell-off, but its fundamentals are solid and dividend growing.

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