There is 24% upside to our price target for Home Depot Inc. (NYSE:HD). We believe that the 17% pullback from its September high provides a favorable entry point, suggests analyst Chris Graja with Argus Research, a leading independent Wall Street Research firm.
The company has raised its dividend at a 22% compound annual rate over the past five years. It also recently raised its target payout ratio to 55% from 50%. The current yield is an attractive 2.3%.
Fundamentals remain strong. HD has raised its operating margin by more than 400 basis points over the last five years. In fiscal 3Q19, EPS rose 36% from the prior year and topped the consensus forecast.
Comp sales at U.S. stores rose 5.4% in 3Q19, on top of 7.7% growth in 3Q18. Online sales rose 28% in 3Q19. Overall economic growth is a more important sales driver for Home Depot than housing activity.
HD is shareholder friendly. The trailing four-quarter return on invested capital was 42.2% in 3Q, up an impressive 970 basis points from the prior year. The ROIC exceeded the cost of capital by 33 percentage points.
The company repurchased $5.5 billion of its stock in the first three quarters of FY19 and has repurchased approximately $80 billion since 2002. Our 12-month target price is $220 per share. This implies a multiple of 22-times our forward-four-quarter EPS estimate.
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