The idea of not buying Home Depot (NYSE: HD) may not seem to make much sense. Few stocks have matched their track record of total return (421% total return over the past ten years compared to the S&P 500’s 250% return). Given the historical dividend growth, many investors benefit from the favorable dividends that go beyond the share price appreciation.
And yet, the current discussion around the stock suggests that buying right now could be a more difficult task than it normally would be. There appears to be some pressure for a stock split for Home Depot. These pressures are likely political rather than financial. So even if the company announces a split, investors are probably better off not adding new shares at this time. This is why.
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Home Depot was a fast-growing company, until it wasn’t.
The company launched its initial public offering in September 1981 when it had a handful of stores in metro Atlanta. After its IPO, it embarked on a feverish expansion. After starting with two stores in 1979, it opened its thousandth location in fiscal 2000 and grew beyond 2,000 stores in 2005. Growth began to level off in 2005 as the retail giant approached a saturation point in the US and Canada. Nineteen years after crossing the 2,000 mark, Home Depot will operate 2,345 stores at the end of the third quarter of 2024. It is clear that location growth has slowed.
Home Depot’s history of stock splits is a tale of two centuries. The company initiated thirteen stock splits between 1982 and 1999. There have been no splits since 1999. Part of the reason for this is that Home Depot stock fell in the 2000s as it transitioned from a growth stock to a value stock. Concerns about the future also persisted as attempts to expand into China and two South American countries failed. Although the company operates 137 stores in Mexico, the less predictable business environment makes its expansion prospects there uncertain.
Home Depot stock still has one advantage: the dividend. Starting in 1987 at a split-adjusted level of approximately $0.0015 per share per year, it has grown to an annual level of $9 per share, with Home Depot’s board approving payout increases in most years. Home Depot increased sales by finding additional opportunities in existing markets, financing that dividend growth.
While it has managed to increase its payout, the company’s performance, especially post-pandemic, has become an increasing concern. Net sales grew just 2% in the first nine months of fiscal 2024 (ending Oct. 27) compared to year-ago levels. Also for fiscal year 2024 and fiscal year 2025, analysts predict that net sales will increase by less than 4% in each of those years.
Unfortunately, this seems to continue a pattern of tepid revenue performance. Net sales fell 3% annually in fiscal 2023, and grew just 4% annually in fiscal 2022. Amid that slowdown, Home Depot’s total returns significantly lagged the past three years S&P 500.
HD Total Return Level data per YCharts
To find a year with double-digit net sales growth, we have to go back to fiscal year 2021, when pandemic conditions helped drive a 14% annual net sales increase. Such financial performance is likely an indication that the company will struggle to grow significantly without finding new markets.
Despite slower sales increases more recently, overall post-financial crisis growth is the likely impetus for the stock split. Since the bottom of the 2009 bear market, that growth has pushed Home Depot’s stock up more than 2,100%, pushing its price to more than $400 per share. Some may think the price makes Home Depot a split candidate, but there are nearly 100 stocks traded on US indices that sell at a higher par price. Price alone is not the reason.
Investors often forget that Home Depot has become one of the largest Dow Jones Industrial Average‘s 30 constituent stocks in 1999. The DJIA is a price-weighted index, meaning a higher nominal share price gives the stock more relative influence in the index. Only of current Dow 30 stocks United Health, Goldman SachsAnd Microsoft trade at a higher stock price. So some want the split to reduce the stock’s influence on the Dow Jones. That is the political influence that plays a role here.
Then there are the usual reasons why Home Depot (and its shareholders) could benefit from a split. More retail investors who don’t have access to buying fractional shares might consider buying Home Depot stock if the stock is trading at a lower price. Additionally, a lower stock price makes it more affordable to buy a covered call (which typically requires purchasing lots of 100 shares), which could spark interest among more active investors. Employees who earn stock options as compensation would be able to more easily manage the exercise of those options if the stock price were lower.
Regardless of whether Home Depot stock splits in the near future, most investors should not add shares just because such an event might occur.
Granted, past dividend growth probably means long-term investors should stick with the stock. The organic growth in today’s markets will likely 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, Home Depot’s stock is becoming less and less likely to attract significantly more buyer interest, even with a lower split-adjusted price. So investors should view this stock as a hold.
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Will Healy has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Goldman Sachs Group, Home Depot, and Microsoft. The Motley Fool recommends UnitedHealth Group and recommends the following options: long calls for $395 in January 2026 at Microsoft and short calls in January 2026 for $405 at Microsoft. The Motley Fool has a disclosure policy.
The Surprise Stock Investors Should Stop Buying Despite a Likely Stock Split was originally published by The Motley Fool
