Why is Home Depot Making a Lot of Money?

Home Depot (NYSE: HD) has obviously not received the memo about the demise of brick and mortar retail. The hardware megastore reported a year-to-year revenue growth rate of 4.44% for 2nd Quarter 2018.

More importantly, Home Depot reported a net income of $2.404 billion, an operating income of $3.381 billion, and a gross profit of $8.617 billion for 2nd Quarter 2018. Business is booming at America’s favorite home improvement store.

Not surprisingly, that business is translating into a lot of cash, including a $3.981 billion operating cash flow for 2nd Quarter 2018. To add icing to the cake Home Depot achieved a free cash flow of $3.433 billion for 2nd Quarter 2018. That’s great because it means the company greatly exceeded its cost of operations.

Home Depot has a Lot of Cash

Beyond that, Home Depot reported $3.599 billion in cash and equivalents on April 29, 2018. That’s great for a retailer, as is the $24.947 billion in revenues Home Depot reported for 2nd Quarter 2018.

Home Depot is a cash rich retailer with a lot of value. That value includes total assets of $25.793 billion reported on April 29, 2018. Those assets included 1,980 Home Depot stores in the United States, 182 Home Depot stores in Canada, and 122 Home Depot stores in Mexico at the end of 2017, according to Statista.

Something I really like about Home Depot is its ability to add revenue without adding stores. Home Depot’s US foot print grew by just three stores in 2017 from 1.977 in 2016 to 1,980 in Statista calculated.

Home Depot is Reducing Debts

This means Home Depot is not taking on mounds of debt like retailers such as Dollar General (NYSE: DG) or Amazon (NASDAQ: AMZN). Instead, Home Depot can make more money by selling more tools and lumber.

Home Depot reported total debts of $25.793 billion on April 29, 2018, which was down from 27.028 billion on January 28, 2018. That means, Home Depot is reducing its debt which is very god for investors.

This retailer will actually have more money to pay out in dividends in the future. Therefore the wonderful Home Depot dividend is safe for the foreseeable future.

The Wonderful Home Depot Dividend

That means Home Depot investors can count on the $1.03 dividend they received on June 14, 2018, for some time to come. Home Depot is a great dividend stock it paid out an 89¢ dividend in 2017, a 69¢ dividend in 2016, and a 59¢ dividend in 2015.

Home Depot is obviously a great dividend stock and a good income stock for these reasons. Those looking for a safe dividend that grows by 10¢ to 20¢ a year should check out Home Depot.

The dividend fundamentals are pretty good at Home Depot as well. On August 3, 2018, Home Depot offered a 2.11% dividend yield, a $4.12 per share annualized payout, and a payout rate of 43.6%.

That makes Home Depot worth the $197.06 you would have paid for it on 7 August 2018. Those who need a stock that generates income and want a retailer will be well-served by Home Depot.

Does Home Depot have a Future?

Despite the great performance there are some dark clouds upon Home Depot’s horizon.

The greatest of those clouds is what City Lab calls the Great Housing Reset, the plummeting rate of homeownership in the United States. The good news is that 63.5% of Americans owned their homes in July 2017, making them potential Home Depot customers.

The bad news is that rate is down from 68.8% in 2005, and the trend is nationwide. City Lab calculated that home ownership rates have fallen in 90% of American metro areas. Rates are falling dramatically in some places, including by 7% in Phoenix.

The trend is particularly marked in some regions, less than half of the nation’s two largest cities (Los Angeles and New York) are homeowners. Home ownership rates are low in growing regions, for example 57.5% in Austin, Texas, and 52% in San Diego.

This bodes ill for Home Depot because renters are less likely to be do-it-yourselfers. There are some opportunities because landlords and house flippers will need supplies for their projects.

A trend that is an opportunity for Home Depot is an increase in home ownership in gentrifying areas. That is historic areas with lots of older houses that presumably need lots of work. Home Ownership in Atlanta’s Georgia Tech Neighborhood jumped from 13% to 32.5% in 11 years.

Falling Home Ownership Rates Threaten Home Depot

More frightening is the drop in home ownership among younger Americans. Back in 2005, around 50% of those under 34 owned homes, by 2015 that rate had fallen by 15% to 35%. The ownership rate for those between 35 and 44 fell from 69% to 56% during the same time period.

A greater threat is the drop in homeownership among the less educated. Back in 2005, 68% of high school graduates and 57% of high-school dropouts owned their homes. By 2015 those numbers had fallen to 56% for high school grads and 49% for dropouts.

This is problematic for Home Depot because less-educated and less-affluent will be more likely to do the work themselves. A bigger threat is the number of women, less likely to do certain kinds of work, and couples without kids (affluent enough to hire a contractor).

An obvious opportunity for Home Depot will be the increase in the number of contractors. Most of the contractors will be small businesspeople who will get their supplies from Home Depot.

CHICAGO, IL – MARCH 24: Athony Ross (R) helps Linda Lepp search for an item at a Home Depot store on March 24, 2015 in Chicago, Illinois. The Labor Department reported the consumer-price index rose a seasonally adjusted 0.2% in February from a month earlier, the first rise since October and the largest increase since June. (Photo by Scott Olson/Getty Images)

The Baby Boomer Menace to Home Depot

A long term threat to Home Depot is the aging and die off of Baby Boomers (persons aged 53-73). Boomers will distort the real estate market because they own 32 million homes or one out of five residences in the United States.

Since Boomers are among Home Depot’s prime customers, their demise will cut into the chain’s business. Older people will be less capable of working on the house and have less money to spend at Home Depot. Greater problems will come when Boomers start selling off their houses and drive prices down.

This might be an opportunity for Home Depot, because large numbers of homes might be freed up for those under 53 to buy. Since a lot of those younger home buyers will have less money; they will end up doing the work themselves, and shopping at Home Depot.

The bottom line is that Home Depot faces a slow drop off in sales but some potential opportunities. With its low debt, this company should keep making money and paying those wonderful dividends for the foreseeable future.