In 2022, shares of home-improvement giant Home Depot (HD 0.70%) fell 24%. It hadn’t done that badly since 2007, when shares fell about 33% in the midst of the financial crisis. If you bought shares afterward, at the start of 2008, you would be up more than 1,000% right now.
That’s not to say the stock will go up by another 1,000% over the next 15 years, but it serves as a reminder that even a good business can see its shares go down along with a bear market, even though its operations are solid. And last year’s beatdown can set up Home Depot for a much better performance in 2023. Here are three reasons why I think the stock could outperform the market this year.
1. Its business is resilient
Home Depot has an advantage over other retailers in that customers go to its stores not just for products but for advice. It has built up a reputation as being a top brand in home repair. So while you can buy lightbulbs online from the cheapest site, you might still end up doing so at Home Depot, because while there you can get advice on how to best tackle a home renovation project — if not from staff, then from other, like-minded customers.
And while there have been aberrations in the past, such as the pandemic, that disrupted the company’s growth pattern, generally Home Depot’s growth rate has been pretty consistent over the years:
HD Revenue (Quarterly YoY Growth) data by YCharts
That consistency can help the company deliver strong returns as other businesses are struggling, making it a better investment by comparison.
2. Strong profit margins leave plenty of room to absorb rising costs
What goes great with strong and consistent growth are solid margins, and Home Depot has those, too. Although its gross profit margin isn’t terribly high, its lean operating expenses allow the business to consistently generate a strong bottom line.
HD Gross Profit Margin (Quarterly) data by YCharts
Home Depot’s profit margin has been gradually increasing over the years, which is another great trend for investors to see. It not only gives the company a buffer should costs rise, but it also means it has the flexibility to increase its already high-yielding dividend, should it choose to do so.
3. The company pays a great dividend
Home Depot pays a dividend that yields 2.4%, which is better than the S&P 500 average of 1.7%. On a $25,000 investment, that difference can mean an extra $175 in dividends over the course of a full year.
And for long-term investors, there is plenty of incentive to hold on to the stock as Home Depot’s payout ratio is just 44%, leaving plenty of room for future rate hikes. From a quarterly dividend payment of $0.89 toward the end of 2017, the company has gone on to more than double its payouts since then, now paying $1.90 per share.
Investors worried about a continued downturn in the markets this year could flock to Home Depot for its dividend to help offset losses, which could drive demand for the retail stock and boost its own share price in the process.
Home Depot is a great option for long-term investors
Stability, profitability, and solid dividend income are three fantastic reasons to buy and hold Home Depot’s stock. It had a tough year in 2022, but this year could be a much stronger one for it. At 19 times earnings, the stock’s valuation is in line with the S&P 500 average, making it as good a time as any to buy shares of Home Depot.
David Jagielski 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.