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Friday, 08/29/2003

A Do-it-Yourself Drip
By Nich Sheldon
HD - The Home Depot Inc.

Company Description

Founded in 1978, The Home Depot is the world's largest home improvement specialty retailer and the second largest retailer in the United States, with fiscal 2002 sales of $58.2 billion. The company employs approximately 315,000 associates and has 1,611 stores in 50 states, the District of Columbia, Puerto Rico, eight Canadian provinces, and Mexico. Its stock is traded on the New York Stock Exchange (NYSE: HD - News) and is included in the Dow Jones Industrial Average and Standard & Poor's 500 Index.

[Source: Company Press Release]

Reasons to Invest:

With housing rates reaching an all time low this year, more and more people are looking into purchasing a home. Whether they are first-time buyers or have been homeowners for years, hidden costs (for home upkeep and home improvement) are more than likely going to appear. I know that when I bought my first house many unsuspected costs seemed to find my wallet. My wife and I had to completely redo our yard, replace carpet, lay wood floors, re stain our deck, paint our walls and replace a few outdated light fixtures. With this in mind, where are these homeowners shopping for all of their supplies? One could go to a tree nursery for grass, a carpet store for wood and new carpet, Sherwin Williams for paint and a light store for fixtures, or they could go get all of their supplies from one place, Home Depot (NYSE: HD). If you think about it, it makes sense to go to one store and buy all of the materials you need at one time. Plus the customer service at Home Depot is nothing shy of phenomenal and their ability to answer questions on how to do something is outstanding.

If you have not already figured it out, we are spotlighting Home Depot as our DRIP of the week. Why Home Depot you ask? Well a quick look at their financials and a DRIP investor could easily see that Home Depot's net sales rose 6% over the second quarter to $15.1 billion. Their net income also rose 6% to $907 million. Now HD says that these figures reflect the opening of new stores, which increased their sales figures. What makes us comfortable with HD is the fact that they are opening new stores in an economy where uncertainty reigns. This means that HD believes in their name and believes that by opening more stores they are spreading the word that they are a strong company of which is not going to have file chapter 11 anytime soon.

Home Depot yields a 0.87% dividend, which is a nice incentive. The company also has an annual dividend of $0.28 per share owned. This seven-cent per quarter dividend was recently increased from $0.06 per share. In fact, last Friday HD announced that they were raising their second-quarter cash dividend by 17%. This dividend is payable to shareholders on record as of September 18th, 2003 to shareholders on record as of September 4th. I know this does not leave much time for research as the 4th is next Thursday, but to those aggressive DRIP investors out there this is an opportunity to start making profits now. If you are not an aggressive DRIP investor and you like to research your DRIPs before you go ahead and start purchasing a company's stock (good for you), don't fret this Q2 dividend as we are going to be in this for the long run and many more quarters will pass before you sell off HD.

Right now, HD is see sawing the 32 level. We have a mean target of 37 and change before year-end. If Home Depot opens up more stores and continues to beat estimates and make profits we could see this stock traveling as high as $48 (this is extremely optimistic). Yet we see it fit to note that HD traded 70 in 1999 and 2000, and a break over the 50 level could help urge the stock back to that high. At its current level HD looks very attractive, and we think there is high potential for profits (why else would we spotlight it?).

Let's imagine the worst-case scenario, A. all 1400+ stores shut down and the stock is worthless. B. The company is bought out and sold to other home improvement store chains like Lowe's. C. The stock falters at the $30 level and has a retest of support at $20. Okay now C could totally happen but the stock has not fallen below $20 since it breached this level in 1998, and the only time it fell back to this level was January of this year and upon doing so it shot back up to 30 which has been long term support since 1999.

With that said, lets contemplate the best case scenario, Home Depot beats earnings estimates, hits the 38 mark, profit taking occurs and the stock dips a little allowing new buyers in for a lower premium. These new buyers continue to feed cash into HD and it gets vertical resting around the 50 area. Profit taking occurs, making the stock cheaper and more attractive to new buyers (remember traders like to buy the dip). The stock moves sideways around psychological resistance of 50 and then on the announcement of more good news, beating estimates or grand opening of new stores, the stock breaks over 50 and then uses the 50 level as support as opposed to resistance. I bet you can see where I am going with this. One thing to keep in mind is that an optimistic trader usually does not do as well as a pessimistic trader. Either way, we have looked at both sides of the coin and really do suspect that over the long run Home Depot is headed higher. Good luck.

Until Next Week,
Nich Sheldon

Broker Recommendations

Strong Buy        10
Buy                5
Hold              11
Sell               0
Strong Sell        0

Brokers Covering  26


DRIP Information:
Shares to Qualify = 1
Auto-reinvestment = Yes
Accept Foreign Accounts: Yes
Temper Enrollment:  Yes

Min/Max Investment = $25 to $100,000/year


Reinvestment Fees - 
Dividend investment fees: 5% to $2.50+commission
Cash investment fees: 5% to $2.50+commission
Auto reinvestment fees: 5% to $2.50+commission


Transfer Agent:
Boston Eq
800-577-0177


Corporate Headquarters:
2455 Paces Ferry Road
Atlanta, GA 30339 
Phone: (770) 433-8211
Fax: (770) 431-2685



 
 

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