It looks like The Home Depot, Inc. (NYSE:HD) is about to go ex-dividend in the next four days. This means that investors who purchase shares on or after the 2nd of September will not receive the dividend, which will be paid on the 17th of September.
Home Depot’s next dividend payment will be US$1.50 per share, and in the last 12 months, the company paid a total of US$6.00 per share. Calculating the last year’s worth of payments shows that Home Depot has a trailing yield of 2.1% on the current share price of $288.63. We love seeing companies pay a dividend, but it’s also important to be sure that laying the golden eggs isn’t going to kill our golden goose! That’s why we should always check whether the dividend payments appear sustainable, and if the company is growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Home Depot paid out 54% of its earnings to investors last year, a normal payout level for most businesses. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Thankfully its dividend payments took up just 35% of the free cash flow it generated, which is a comfortable payout ratio.
It’s positive to see that Home Depot’s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. For this reason, we’re glad to see Home Depot’s earnings per share have risen 18% per annum over the last five years. Home Depot has an average payout ratio which suggests a balance between growing earnings and rewarding shareholders. This is a reasonable combination that could hint at some further dividend increases in the future.
Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, Home Depot has increased its dividend at approximately 20% a year on average. It’s exciting to see that both earnings and dividends per share have grown rapidly over the past few years.
Has Home Depot got what it takes to maintain its dividend payments? We like Home Depot’s growing earnings per share and the fact that – while its payout ratio is around average – it paid out a lower percentage of its cash flow. Overall we think this is an attractive combination and worthy of further research.
In light of that, while Home Depot has an appealing dividend, it’s worth knowing the risks involved with this stock. In terms of investment risks, we’ve identified 1 warning sign with Home Depot and understanding them should be part of your investment process.
We wouldn’t recommend just buying the first dividend stock you see, though. Here’s a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.