The idea of not buying Home Depot (NYSE: HD) may seem to make little sense. Few stocks have matched its track record for overall returns (total return of 421% over the past decade compared to the S&P 500's 250% return). Given its historical dividend growth, numerous investors benefit from its favorable dividends above and beyond its stock price appreciation.
And yet, the discussion around the stock at the moment suggests buying right now might be a tougher call than it would normally be. There appears to be some pressure for a stock split for Home Depot. This pressure is more likely political rather than financial. So even if the company announces a split, investors are likely better off not adding more shares at the moment. Here's why.
Home Depot and stock splits
Home Depot was a fast-growing enterprise -- until it wasn't.
The company launched its IPO in September 1981 when it had a handful of stores in metro Atlanta. After the IPO, it began a feverish expansion. After starting with two stores in 1979, it opened its 1,000th location in fiscal 2000 and grew beyond 2,000 stores by 2005. The growth began to plateau in 2005 as the retail giant approached a saturation point in the U.S. and Canada. Nineteen years after crossing the 2,000 mark, Home Depot operates 2,345 stores as of the end of the third quarter of 2024. Clearly, location growth has slowed.
Home Depot's history of stock splits is a tale of two centuries. The company initiated 13 stock splits between 1982 and 1999. Since 1999, no splits have occurred. Part of the reason for that is that Home Depot stock declined in the 2000s as it transitioned from a growth stock to a value stock. Also, worries about the future persisted as efforts to expand into China and two South American countries failed. While it operates 137 stores in Mexico, its less predictable business environment makes expansion prospects there uncertain.
Home Depot stock continues to have one advantage -- its dividend. Beginning in 1987 at a split-adjusted level of around $0.0015 per share yearly, it has grown to an annual level of $9 per share, with Home Depot's board approving payout hikes in most years. Home Depot grew revenue by finding additional opportunities in its existing markets, helping to fund that dividend growth.
While it has succeeded in growing its payout, the business's performance, especially after the pandemic, has become an increasing concern. Net sales grew by only 2% in the first nine months of fiscal 2024 (ended Oct. 27) compared with year-ago levels. Also, for fiscal 2024 and fiscal 2025, analysts forecast net sales rising by under 4% in each of those years.
Unfortunately, this seems to continue a pattern of tepid revenue performance. Net sales declined 3% annually in fiscal 2023, and only grew by 4% yearly in fiscal 2022. Amid that slowdown, Home Depot's total return has significantly lagged the S&P 500 over the last three years.
HD Total Return Level data by YCharts
To find a year with double-digit net sales growth, one has to go back to fiscal 2021, when pandemic conditions helped drive a 14% annual increase in net sales. Such financial performance is a likely indication the company may struggle to grow significantly without finding new markets.
So why a possible stock split now for Home Depot?
Despite slower revenue increases more recently, the likely impetus for the stock split is the overall growth after the financial crisis. Since the bottom of the 2009 bear market, that growth helped Home Depot stock rise over 2,100%, taking the price to over $400 per share. Some might think that price makes Home Depot a split candidate, but there are nearly 100 stocks trading on U.S. indexes that sell at a higher nominal price. Price alone isn't the reason.
Investors often forget that Home Depot became one of the Dow Jones Industrial Average's 30 component stocks in 1999. The DJIA is a price-weighted index, meaning a higher nominal stock price gives the stock more relative influence in the index. Of the current Dow 30 stocks, only UnitedHealth, Goldman Sachs, and Microsoft trade at a higher stock price. So some want the split to reduce how much influence the stock has on the Dow. That's the political influence coming into play here.
Then there are the usual reasons why Home Depot (and its shareholders) might benefit from making a split. More retail investors who don't have access to buying partial shares of stocks might consider buying Home Depot stock if shares are traded at a lower price. Moreover, a lower stock price makes it more affordable to buy a covered call (which generally requires buying in 100-share lots), which could draw interest from more active investors. Employees who earn stock options as compensation would have an easier time managing the exercise of those options if the share price was lower.
Stand pat on Home Depot stock
Regardless of whether Home Depot stock splits in the near future, most investors should not add shares just because such an event could occur.
Admittedly, its past dividend growth probably means that long-term investors should stay with the stock. Organic growth in its current markets will probably be enough to justify continued dividend increases, making Home Depot an excellent choice for its existing income investors.
However, with few apparent new growth prospects, it is becoming less likely Home Depot stock will attract significantly more buyer interest, even with a lower, split-adjusted price. Thus, investors should treat this stock as a hold.
Should you invest $1,000 in Home Depot right now?
Before you buy stock in Home Depot, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Home Depot wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $858,854!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. TheStock Advisorservice has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of November 18, 2024
Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group, Home Depot, and Microsoft. The Motley Fool recommends UnitedHealth Group and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
