Home Depot

The stock for DIYers

Do-it-yourself (DIY for short) is all the rage right now. Creating something yourself is so much nicer than just buying a finished product. Doing crafts with the kids, making small repairs around the house or tending the garden - with homemade things you feel joy and pride at the same time. Trend researchers attribute the DIY trend to the increasing digitalization of everyday working life. A lot of the work that used to have to be done by human hands is now handled by a robot. As a result, people are getting hands-on again more often in their free time and finding inner balance that way.

Home Depot, the world's largest home improvement chain, is benefiting from this trend. But the company isn't only raking in hefty profits in the DIY segment - the business for professional home builders keeps picking up too. Since the slump during the 2007/08 financial crisis, the real estate market has normalized again in the meantime.

The origins and business model of The Home Depot Inc.

The story of The Home Depot began in the spring of 1978 with 2 words: "You're fired!" Bernie Marcus and Arthur Blank were both employed at Handy Dan - one of the first home improvement store operators in the USA. And even though Marcus and Blank sat on the company's board, they had to leave Handy Dan in the middle of a corporate crisis. For the two of them, however, it was quickly clear that they would carry on on their own.

They brought banker Ken Langone and retail merchant Pat Farrah on board and started planning. They wanted to be bigger, better and cheaper than all their competitors. And so, after almost a year of development, they opened their first two stores in Atlanta. They chose this location because Atlanta had an airport and lots of cheap real estate. The founders saw long-term potential in that. In the beginning, the top shelves were mostly stocked with empty boxes to suggest a larger selection to customers - true to the motto "Fake it, till you make it!"

Right from the start, Home Depot placed great emphasis on customer service. Blank and Marcus had a clear business vision: only enthusiastic DIYers who made it their mission to give customers targeted help should work in their stores. They didn't want to hire salespeople who were only hoping for a quick sale. So the first workshops soon came about, where customers could learn how to repair broken things themselves or build things on their own.

It was precisely this helpful approach to customers that brought Home Depot huge success. Today the company owns almost 2,300 stores in the USA, Canada, Mexico and a few other countries. And even though 97% of customers are private DIYers, the remaining 3% who are professionals now account for 40% of revenue. That's also one reason why Home Depot acquired Interline Brands, a company specializing in professional contractors, in 2015.

What does the future hold for Home Depot?

One point that will surely worry some shareholders is Amazon and online business in general. Indeed, many retail chains have a hard time today when customers would rather order conveniently online. With home improvement stores, though, that's not the case (yet). Many people prefer to visit a specialist retailer, since they can also ask their specific questions there. Nevertheless, Home Depot has massively expanded its online presence. The stores have been expanded with pickup bays where customers can quickly collect goods they ordered online. In addition, the company has a first-class logistics infrastructure that can deliver even bulky goods without any problems. Home Depot is also positioning itself as a rental provider for large garden and construction tools as well as car trailers or small excavators.

Is the stock worth it from a dividend perspective?

Oh, you bet it is! Home Depot has been paying out a share of its profits to its shareholders since 1987. And it has been raised steadily over the last 10 years as well - by an impressive 16% on average. So Home Depot gets to count itself among the dividend nobility. The current dividend yield comes to almost 2.9%, and with a payout ratio of 49% there's still enough money left in the company for more store openings or other investments. Home Depot has also launched a share buyback program, which will surely push the share price up further.

Conclusion:
Home Depot's founders had a vision that they pushed through with iron will. The focus was always on customer satisfaction & that has paid off. Today the home improvement chain is the largest in the world. For investors, this is a wonderful investment opportunity - even if the stock is once again trading at an all-time high.