Got some idle cash you're looking to put to work, but don't know where to put it? Consider stepping into a stake in retail giant Home Depot (NYSE: HD) . Shares of the home improvement chain haven't been impressive of late, peeling back from March's peak before getting the chance to test 2021's all-time high.
There's a reason the stock is staying within striking distance of either price point, though. That's because at least a few investors understand that its shares are undervalued and the company's future remains bright. To this end, here are four specific reasons to buy Home Depot shares now.
1. Home Depot is built to last -- and thrive
It may be down right now, but it's hardly out. Home Depot stock will bounce back just like it always has because the underlying company is poised to bounce back as well. This rebound will largely be fueled by its sheer size and subsequent reach.
With more than 2,300 locations across North America, Home Depot is the world's biggest chain of hardware stores. Sure, nearest rival Lowe's Companies is respectably sized as well, with a little over 1,700 locales. Home Depot is the decidedly dominant name in the industry, however, doing 60% more business than Lowe's does, largely due to its greater number of relationships with professional contractors (who account for roughly half of the retailer's total sales).
Indeed, Home Depot single-handedly facilitates around 30% of the nation's total spending on home improvement, according to data from market research outfit Numerator. That's huge.
Being bigger doesn't always necessarily mean being better, of course. Plenty of smaller companies are terrific opportunities, too. This is a case, however, where being bigger is a sign that Home Depot is logistically better at delivering what consumers and contractors want at a price they like. Simply being geographically "there" doesn't hurt, either.
2. It's working on its dividend pedigree
Investors in need of reliable dividend income growth won't quite get that from Home Depot. Although the company's dished out at least a little cash every single quarter since it began paying dividends back in 1987, it hasn't raised these payments like clockwork.
For a short while after 2000's dot-com implosion, the home improvement retailer's dividend simply stagnated, for instance, as it did following 2008's subprime mortgage meltdown. In light of the uncertain economic circumstances in place at those times, Home Depot was wisely being conservative with its cash.
HD Dividend data by YCharts
Don't let these lapses in the company's dividend growth, however, prevent you from recognizing that Home Depot is still a tremendous dividend stock with an impressive dividend pedigree. It still paid dividends during those rough patchess.
As long as the economy remains reasonably healthy, this retailer's willing and able to up its annual payout. Indeed, its quarterly dividend payment has grown at an annualized pace of 18% since it started growing again back in 2010.
3. The stock is down 14% from March's peak
A 14% discount from a recent high isn't a screaming bargain by most stocks' standards; that's especially true when the high in question follows a red-hot run-up like this one did.
Home Depot stock isn't like most other stocks, however. Its shares don't "go on sale" much more than they're on sale right now. They don't remain at a discounted price for very long, either.
In a similar vein, while the forward-looking dividend yield of 2.6% isn't the strongest you can find among blue chip stocks, that's about as high as Home Depot stock's yield has been in over a decade.
In other words, don't be so stubborn about your entry price that you end up missing out on a great opportunity.
4. A homebuilding recovery is on the horizon
Last but certainly not least, interested investors may want to go ahead and take the plunge on Home Depot stock simply because the core reason for its subpar performance going back to early 2022 is likely about to wither away.
That's dried-up demand for new houses, of course. With real estate prices as well as interest rates both still uncomfortably high, consumers are buying far fewer homes. May's annualized pace of new-home sales within the United States fell to a six-month low of 619,000 units, well down from late-2020's peak rate of over 1 million newly built homes. The number of new building permits issued in May fell to a multiyear-low annual pace of just under 1.4 million as well. It's just grim.
US New Single Family Houses Sold data by YCharts
As the old adage goes, though, nothing lasts forever. The real estate market is predictably cyclical, in fact, meaning that a turnaround of most all of its facets is likely in the works. This includes lower prices, lower interest rates, and an uptick in construction of new homes once buying them becomes more affordable again.
It's not exactly clear when such a recovery might take shape. There's the rub. It may not begin materializing this year, or even next year (although it's seemingly unlikely that the lull would persist that long).
What we do know is that such turnarounds don't become obvious until well after they've begun. We also know that stocks have a tendency to be predictive of these recoveries rather than reactive to them. That's why Home Depot stock's recent pullback is a buying opportunity. You want to be positioned before that inevitable rebound starts taking hold, particularly given that half the company's revenue comes from contractors.
James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot. The Motley Fool recommends Lowe's Companies. The Motley Fool has a disclosure policy .
Most Popular
Comments / 0