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Avoid Buying Home Depot Stock Even After Its Record Breaking 2020

Over the last couple months, I’ve shown you stocks to avoid…

Stocks to consider buying…

And some of the best stocks related to the coming Internet of Things…  Which you can find linked further below.

All these recommendations are to help you either avoid pain and terrible stocks.  Or to help you find potentially great stocks to invest in during this pandemic.

If you do both well, it helps you earn higher than average investment returns and build wealth.

Because the fewer investment losses you have the more capital you keep. And the more capital you keep the faster you compound your money.

With that all in mind let’s find out why I recommend you avoid investing in an otherwise great company today.

Home Depot (HD) is the world’s largest home improvement specialty store.

It’s based in Atlanta Georgia.  It has a $280.72 billion market cap. And it pays a 2.54% dividend… Which is reason #1 to consider buying its stock.

Home Depot’s 2.54% Dividend

Over the last decade Home Depot’s paid out a total of $24.82 per share in dividends.

At today’s share count of 1.081 billion shares that’s equal to $26.83 billion paid out to shareholders in that time.

It also grew its dividend 523% from $0.94 per share in 2011 to $5.86 per share now.

These dividend payments will help you in normal times earn cash if you take the money out.  Or allow you to buy more shares over time if you reinvest the dividends.

These regular payments will help you earn more money for your retirement.  And the solid, stable, and growing dividends will help in any kind of prolonged economic issues like we’re dealing with today.

It can do this because it earns solid profits.  Which is reason #2 to buy Home Depot for your retirement portfolio.

Home Depot Earns Huge Profits

Over the last decade it earned an average operating income margin of 12.4% per year.

I look for anything above 10%. 

Another way to show this is with its free cash flow to sales ratio (FCF/Sales). Over the last decade its 8.4% per year on average.

I call this the “Cash Machine” metric.

I look for anything above 5% on a consistent basis for the same reasons as I look for high operating profit margins above.  If a company surpasses both thresholds it makes it a great operating business that is safe and ultra-valuable.

And Home Depot falls into this category.

These profits also allow it to continually reinvest in operations to keep competitors away.

Which means it can keep growing and dominating.  It showed this on February 23rd, 2021 when it released its most up to date quarterly earnings that were records.

  • Sales grew 19.9% from 2019 to $132.1 billion.
  • Earnings rose 16.5% from 2019 to $10.25 per share.
  • And this all allowed the company to increase its dividend by 10% to $1.65 per share quarterly.

This is all fantastic.

But this is where things start going sideways a bit for Home Depot.

Because most companies that have huge profits don’t have a lot of debt… But Home Depot does.

Home Depot Has A Large Amount Of Debt

As of this writing Home Depot has $14.65 billion in cash compared to $41.04 billion in debt.

As a percentage of its balance sheet total liabilities make up 97.7%.

And its debt-to-equity ratio is 26.74.

These are all above my normal thresholds for what I look for in an investment. And the debt-to-equity ratio is far above the 1 and below I look for.

Because of Home Depot’s large profits and cash flows it can sustain more debt without it becoming an issue.

But it does give me some pause.

The other major problem is its stock is overvalued right now too.

Home Depot IS NOT Cheap

With the markets at or near all-time highs you’d expect a fantastic stock like Home Depot to be selling at an enormous valuation.

It’s not… But it’s still overvalued.

As of this writing its P/E is 21.8.

Its P/CF is 14.9.

Its forward P/E is 20.8.

And its enterprise value to operating income – EV/EBIT is 17.2.

On all three metrics at the top, I look to buy investments below 20 to consider them undervalued.

And on EV/EBIT I look to buy stocks below 8.

This means, Home Depot is overvalued by a decent amount now.

And this means owning its stock gives you no margin of safety in investing terminology.

When you invest in stocks that have a margin of safety it makes the investment safer.  And it also means you should expect to earn higher returns owning it in the coming years.

The inverse of this is also true…

When you invest in a stock without a margin of safety it makes the investment riskier.  And it also means you should expect to earn less owning its stock going forward.

With Home Depot being overvalued it makes the investment riskier. Especially when you consider its large debt load. Even with the other wonderful things above.

Conclusion

If you’re looking for a solid, safe, stable, and enormously profitable investment to buy to earn high and safe returns for your portfolio – consider investing in Home Depot… But only when it’s cheaper and it has lower debt.

You can also use the following links to some of our recent articles to learn other ways to protect yourself and your investments in these uncertain times.

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.

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