Home Depot (HD -0.30%) has succeeded by becoming a go-to supplier for construction, repair, and remodeling projects for individuals and businesses. Founders Stanley Marcus and Arthur Blank succeeded by bringing together home improvement-related needs, such as lumber, plumbing, electrical, flooring, and other product lines under one roof.
Over time, this approach made it the world’s largest home improvement retailer. However, growth has slowed in recent years, and with its current markets saturated, investors are right to wonder what will drive the company’s growth in the future. Is the retail stock worth owning under these circumstances, or should investors avoid it altogether?
The state of Home Depot
When looking backward, at least, Home Depot is one of the most successful growth stocks in history. A $1,000 investment in its 1981 initial public offering (IPO) is worth nearly $29 million in total stock returns.
HD Total Return Level data by YCharts.
Even today, it has outpaced the indexes over the last 10 years.
The problem is its performance during the 2020s. While it appeared to outperform for most of the current decade, the S&P 500‘s total return has a slight edge over the home improvement giant. The outperformance is even more dramatic over shorter time frames, like one year or three years.
So, what happened?
Home Depot thrived for decades on rapid expansion across the U.S. and later Canada and Mexico. As its North American markets became saturated, the company attempted to expand into countries such as Chile, Argentina, and China. All of these attempts ended in failure.
With expansion seemingly off the table, it worked to increase sales at current locations, employing tactics such as fostering omnichannel retailing and building direct relationships with contractors. For a few years, that led to increased sales. However, net sales failed to grow consistently during the 2020s and actually fell 2% in the first quarter of fiscal 2024 (ended April 28).
Unfortunately, due to saturation in its markets, its store count of 2,335 locations grew by only 13 stores in 2023. Moreover, since 2011, it has only opened 83 stores. Since it has not shown any obvious interest in new markets in recent years, one has to wonder where it will find growth.
Is there a case for owning Home Depot
Despite such concerns, investors are not turning away from the company. Home Depot stock produced total returns of 7% over the last 12 months. Additionally, investors continue to take to its $9 per-share annual payout. At current levels, it offers a dividend yield of 2.6%, approximately double the S&P 500 average.
Furthermore, it has increased the payout most years since it began in 1987 when its split-adjusted payout was $0.001756 per share annually. This means the dividend has risen more than 5,100-fold in its 37 years! Hence, some of the longest-term investors receive more than their original investment back every quarter, making it unlikely that that cohort would sell their shares for any reason.
Should I own Home Depot shares?
Under current conditions, Home Depot stock is a hold. Even if one does not earn their original investment back in dividends every quarter, the payout may make the stock too lucrative to sell for many shareholders.
Moreover, the need to build, repair, and remodel homes and other structures will likely keep shoppers in their stores. That should support revenue levels high enough to make a massive drop in the stock unlikely.
Nonetheless, its recent underperformance is a concern. With the stock’s growing track record of underperforming the S&P 500, investors should probably refrain from adding shares until a more obvious growth plan for the company materializes.
Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot. The Motley Fool has a disclosure policy.