Home Depot (NYSE: HD) has made a habit of updating its capital return plans during its fourth-quarter earnings reports, which means investors are likely to see a new dividend when the retailer announces results on Tuesday. Home Depot’s quarterly dividend is currently $0.89 per share, which yields just under 2% at the current share price.
Let’s take a look at why a payout hike looks likely.
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Wrapping up a good year
Home Depot is likely to announce unusually strong results on Tuesday, in terms of its operations and its finances. Management’s latest forecast calls for 6.5% comparable-store sales growth to mark a solid acceleration over the 5.6% it achieved in each of the past two fiscal years.
Some of that speedup was derived from a temporary lift provided by recovery efforts tied to natural disasters that struck the U.S. and Mexico last year. However, Home Depot is outgrowing rival Lowe’s (NYSE: LOW) , too, where comps are on pace to rise by just 3.5% for the full year.
And Home Depot is converting more of its revenue into profits. Operating income rose to $11.5 billion through the first nine months of the year, or 14.9% of sales, compared to $10.5 billion, or 14.5% of sales, a year ago. Lowe’s profitability trails this result by a wide margin.
HD Operating Margin (TTM) data by YCharts
Plenty of cash to go around
A few other factors suggest the home improvement giant could reveal a significant dividend boost. For one, CEO Craig Menear and his executive team recently announced a major increase to their planned share repurchase spending. Rather than the $5 billion they had originally targeted, executives said in November that they would be returning $8 billion to shareholders through that channel in 2017, including $2.1 billion of buybacks in the fourth quarter. That shows management is bullish on the company’s long-term growth outlook, and implies that it isn’t struggling to generate cash over and above what it takes to run the business.
In addition, Home Depot should receive some large ongoing benefits from the recent corporate tax cuts, which could factor into management’s thinking as regards the next dividend.
How big of a raise?
Home Depot says it aims to return 55% of its earnings to shareholders through dividends, making it more generous than many retailers, including Lowe’s, with its 35% payout target. But the company has fallen a bit short of that goal since it was established a year ago. The dividend amounted to 42% of net income in 2016, and rose to just 46% through the first nine months of fiscal 2017.
As a result, management should have room to increase the payout by significantly more than the 11% profit increase Home Depot is expected to achieve for the year. (EPS should rise by 14% thanks to those stock buybacks.) Sure, income investors aren’t likely to see a raise that rivals last year’s 29% hike . But it wouldn’t be reckless of the management team to boost the annual dividend by 15% or 20%, given the rock-solid results and impressive growth Home Depot has delivered over the past 12 months.
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Demitrios Kalogeropoulos owns shares of Home Depot. The Motley Fool has the following options: short May 2018 $175 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Home Depot and Lowe’s. The Motley Fool has a disclosure policy .
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