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Tue. May. 27, 2008

Home Depot Makes It Seven In a Row *

After the market closed on May 22, 2008 Home Depot (HD) announced that its board of directors declared a first quarter cash dividend of 22.5 cents per share. The dividend is payable on June 19 to shareholders of record on the close of business on June 5.

This extends the string of flat dividends to seven dating back to the November 2006 dividend. Since 2004, HD has raised its dividend in the month of November (except November 2007). The flat dividend this quarter did not surprise me. I also expect the August 2008 dividend to remain flat at 22.5 cents. This is where it get interesting.

The way HD has timed their dividend increases, they showed a year-over-year (YOY) increase for calendar year 2007. Even after eight flat dividends, HD can still end up with a YOY increase from 2007 to 2008 with an increase in November 2008. Management knows this.

Though not as bad as a dividend cut, a flat dividend is a close second. From a perception standpoint, a YOY flat dividend will not bode well with the dividend investing contingent of HD’s shareholders. HD’s 3.34% yield is good, but not good enough for most dividend investors to swallow a flat YOY dividend. The 3.34% yield is misleading since a large portion of it came through HD’s share price decline. For example, my yield-on-cost (annual dividend $/cost basis) is 2.49%, significantly lower than the current yield.

Beyond the broader problem of declining residential construction, HD continues to battle with customer service issues. Home Depot Chief Executive Frank Blake was grilled by several shareholders at the company’s annual meeting about substandard customer service experiences in HD stores.

As noted in my “State of the Dividend Address“, I currently have HD “On The Shelf”. This means I am taking a wait and see approach and not adding to my position. If HD does not increase its dividend over the next two quarters, I will reevaluate to determine if it belongs in my dividend income portfolio.

At the time of this writing, I owned shares of HD (2.0% of my income portfolio).

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5 Responses to “Home Depot Makes It Seven In a Row *”

  1. Jake (DIB) says:

    I tend to think the downturn in residential property is quickly approaching a bottom. The fact HD hasn’t raised dividends for seven quarters in a row is evidence, to me anyway.

    I had the exact opposite experience at HD with customer service a few weeks ago. I needed to return something and they were extremely fast and extremely friendly.

  2. Dividends4Life says:

    Jake: I hope residential is about to turn, but I am not totally convinced yet. the inventory of constructed but unsold homes is still huge. The banks will probably be the first to recover.

    Best Wishes,
    D4L

  3. passivefamilyincome says:

    I prefer LOW over HD any day of the week, just from shopping at the two stores. HD always is empty where I live. LOW actually has some people shopping at it. We recently were in the market for a new fridge and I went to both stores to comparison shop. I walked around for 30 minutes at HD looking for someone to help me and got tired of it and left. I went across the street to LOW and was approached by multiple employee’s asking if I needed help. This scenario has happened to me several times actually in the past several months. Outside of the numbers, I think LOW is a much better company.

    Just my opinion.

  4. Alain says:

    Well colour me disapointed. I was looking for a glimmer that HD understood that thier days of double digit market growth was over and as a consquence would start hiking thier dividend. Seems that’s not the case.

  5. Dividends4Life says:

    passivefamilyincome: I drive past a HD to shop at at LOW. LOW’s numbers have improved over the last few years. I have them on my watch list.

    Alain: HD’s management is in trouble. It will be interesting to see if they can recover.

    Best Wishes,
    D4L