This Blue Chip Dividend Growth Gem Should Be on Every Income Investor's Radar

Many dividend growth investors avoid cyclical stocks in order to secure a reliable income stream and protect themselves from the emotional pressure related to the cycles of the economy. As a result, they might stay away from consumer cyclicals such as retailers. But not all retailers are struggling. Home Depot is a consumer cyclical stock. However, the home improvement retailer is not a typical cyclical stock. It greatly benefits from the secular growth of the housing market and the continued boom in e-commerce. The stock has rallied nine-fold over the last decade. And it has also raised its dividend at a double-digit rate every single year for more than a decade. Home Depot is a blue-chip dividend growth gem, which should be on the radar of every income-oriented investor. Business Overview Home Depot is a home improvement retailer, with 2,298 stores in the U.S., Canada and Mexico. It was founded in 1978 and has grown to a gigantic retailer, which has reached a market capitalization of $330 billion. As a consumer cyclical stock, investors might have expected Home Depot to struggle during the coronavirus crisis last year. However, this was not the case. As consumers were forced to stay at home, they spent a great amount of time on renovating their homes while they also took advantage of the unprecedented fiscal stimulus packages offered by the government in response to the pandemic. As a result, Home Depot grew its revenues 20% last year, to an all-time high of $132.1 billion from $110.2 billion. It also grew its earnings per share 16% to a record of $11.94, from $10.25 . Overall, Home Depot proved extremely resilient to the pandemic. The strong business performance has remained in place this year. In the first quarter, Home Depot grew its comparable sales 31% over last year's quarter, with double-digit growth in both the number of transactions and the average ticket. All of the top 40 markets of the company posted double-digit growth rates in comparable sales. Thanks to the economies of scale that resulted from the increased sales, Home Depot reduced its operating expenses to 18.6% of sales from 22.5% of sales. As a result, it greatly enhanced its operating margin and thus grew its earnings per share 86%, to $3.86 from $2.08. Moreover, the strong business momentum has remained in place in the first two weeks of the running quarter, with comparable sales growth in the U.S. above 30%. Thanks to the strength of the housing market and the strong cash positions of consumers, Home Depot is on track to post new all-time high revenues and earnings this year. Home Depot should be praised for managing unprecedented levels of product flow through its supply chain without any problems, despite the challenges posed by the pandemic. In addition, the company does not rest on its laurels. It continues to rollout new capabilities, such as the ability to include products from the site and a store in a single transaction. Such initiatives enhance customer satisfaction and secure the leading position of Home Depot in its industry. Growth Catalysts Home Depot greatly benefits from the secular growth of the housing market. Since the Great Recession, in 2009, the housing market has returned to its long-term growth trajectory and thus it has provided a strong tailwind to the business of Home Depot. Moreover, Home Depot will greatly benefit from the recovery of the economy from the pandemic. The U.S. government implemented unprecedented fiscal stimulus packages to support the economy. As a result, consumers are now in an exceptionally strong financial position and they are spending great amounts on discretionary expenses, including home improvement. Another growth driver for Home Depot is the expansion of its operating margin, which results from the enormous economies of scale it enjoys. The retailer has grown its revenues every single year over the last decade, at a 7.2% average annual rate. Thanks to economies of scale, it has enhanced its operating margin to 15.6% now, from 9.5% in 2011. As the retailer will continue growing its sales, it will keep widening its margins. This is an additional growth driver. Finally, Home Depot recently announced a $20 billion share repurchase program. This amount can reduce the share count by 6% at the current stock price. Overall, Home Depot has several growth drivers in place: the secular growth of the housing market, the recovery of the economy from the pandemic, margin improvement and share repurchases. We expect Home Depot to grow its earnings per share at a 9% average annual rate over the next five years. Dividend Analysis Home Depot has consistently grown its earnings per share over the last decade, at a tremendous 19.1% average annual rate. This rising earnings growth has fueled a higher share price and annual dividend growth, which are the two ways investors can maximize returns from stocks. It has thus been able to grow its dividend at a 21% average annual rate throughout this period. Even better, the company has hardly decelerated in recent years. In the last five years, Home Depot has grown its dividend at a 20% average annual rate. Therefore, while the current 2.2% dividend yield of the stock may seem uninspiring to most income-oriented investors, the impressive dividend growth rate should compensate for the lackluster current yield. Moreover, Home Depot currently has a healthy payout ratio of 50%. Given also its rock-solid balance sheet and its promising growth prospects, Home Depot can easily continue raising its dividend for many more years at an attractive rate. For example, the company can easily raise its dividend at an approximate 10% average annual rate in the upcoming years, due to its strong EPS growth and low payout ratio. Final Thoughts Home Depot is an ideal stock for those who want to benefit from the secular growth of the housing market and the economies of scale achieved by the leader in home improvement products. The company has an impressive and consistent performance record, with double-digit growth of earnings per share and dividends every single year for more than a decade. This dividend growth gem should be on the radar for dividend growth investors.

This Blue Chip Dividend Growth Gem Should Be on Every Income Investor's Radar

The stock has rallied nine-fold over the last decade, while the dividend ha increased at a double-digit rate every single year for more than a decade.

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