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π§ I Bought The Orange Box...
Published about 12 hours agoΒ β’Β 5 min read
Here's your weekly helping of interesting investing information and insights.
Opinion
You might not know this, but Home Depot (HD) is often called "the orange box" β and the market kicked that box down a flight of stairs. Once HD dropped below $300, I started a position in my Roth IRA. Some people have a weakness for women in miniskirts and boots. Mine? Well-known companies whose stock prices have been beaten down.
SimplySafeDividends.com
Right off the bat, look at what you're getting at this price: a 3.13% dividend yield (well above its 5-year average), a "Very Safe" dividend score of 87, and an A credit rating. That's a quality business going through a rough patch.
Home Depot is about as easy a business to understand as it gets. They sell just about anything you'd need to fix up wherever you call home (and sometimes work too). We also shop there frequently, which is a nice bonus β Peter Lynch would approve.
As of this writing, HD has fallen 31% off its December 2024 all-time high. The reasons are everywhere: a frozen housing market, mortgage rates stuck above 6%, tariffs, inflation, Covid spending that got pulled forward into 2020-2022, and a market that only seems to care about AI, semiconductors, and data centers.
Here's the main thing β housing demand is super pent-up. We can attest to it personally. Our mortgage rate is 2.25%, so we're not going anywhere. And nationally, about two-thirds of homeowners are locked into mortgages under 4%. Nobody's moving. And when people don't move, kitchens don't get remodeled and bathrooms don't get redone.
But this won't last forever. The housing market will heat up again β we just don't know when. So buying Home Depot right now is a lot like living in Chicago in January and buying a swimsuit on clearance. You won't use it tomorrow, but you know summer's coming.
What really sold me is the aging housing stock. Our house was built in 1972 and the median U.S. home is now 42 years old, up from 31 in 2005. Old houses need new roofs, new HVAC, new windows, new everything β whether or not anyone's selling. That's Home Depot's whole reason for existing.
Home Depot has also been making a calculated bet outside the big-box store. They acquired a B2B distributor called SRS, which then bought GMS to go even deeper into serving contractors β the "Pros." If a company needs a few thousand sheets of drywall for an apartment remodel, they're not loading that into a pickup at the store. They order it from SRS and have it delivered straight to the jobsite. Lower margin, but higher volume and way stickier. So sticky, in fact, that Lowe's is now scrambling to copy the playbook with its own B2B acquisitions.
If you're a dividend investor, check this out...
SimplySafeDividends.com
HD has raised its dividend 17 years in a row and hasn't cut it in 38 years β straight through the 2008-2009 housing crash. That's a business that knows how to survive the bad times.
Their ROCE (return on capital employed β basically how good management is at turning capital into profit) has averaged in the 40% range over the last decade. Anything above 20% over that long is exceptional.
That said, the pressure is real and it's showing up in the numbers.
SimplySafeDividends.com
The free cash flow payout ratio has climbed to 72%, well above their historical norm. Management just raised the dividend by a measly 1.3% β way below the 14% 10-year average. As a dividend growth investor, I don't love that. But I respect it. It tells me management knows they're in a nasty cyclical trough and they're being careful with the cash.
I'd start getting nervous if that payout ratio climbed over 90% and stayed there, because at that point there's almost no cushion left and a cut becomes a real risk.
The good news is management has kept buying back shares the whole time.
SimplySafeDividends.com
Share count is down from 1.23 billion in 2017 to about 995 million today β that means every share I buy represents a bigger slice of the pie than it did a few years ago.
I'm also watching their debt.
SimplySafeDividends.com
Net debt to capital is at 83%, but it's been declining since 2024, which is the trend I want to see continue.
So what's the plan?
AlphaSpread.com
Alphaspread.com pegs HD's intrinsic value in the mid-$270s β just one model's guess. I'm comfortable buying a few shares a week in the $290-$320 range, and I'd back the truck up if we see anything under $290. Over $350-$380, I'd taper off and probably stop.
The plan is to buy methodically. Or, as Jim Cramer says, "hold and homework." Love him or hate him, I think he's right β very few companies are "buy and hold till death do us part." You hold, you keep watching the fundamentals, and if the story breaks, you exit.
Right now HD is just 0.10% of my portfolio. That's intentional. I'm not trying to nail the bottom β I'm building a position one paycheck at a time and letting the dividends compound while the housing market does its slow, boring work of waking back up.
So that's why I'm buying the orange box. Are you buying anything housing-related right now? I'd love to hear it by hitting REPLY.
The Compound and Friends had a most interesting roundtable chat about what could go wrong for the major AI/Tech companies going forward. Interestingly, they likened it to the "winners" of the telecom space being AT&T, Verizon and T-Mobile.
Disclaimer: This is not investment advice. Do your own research before making any investment decisions.
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