Slowing growth shouldn’t cause investors to overlook this dividend stock

Sthe beers jumped for Home deposit (NYSE:HD) due to the COVID-19 outbreak. Suddenly people were working, learning and playing at home most of the time. Many homes were not equipped for this, which spurred spending on improvements, renovations and additions.

Of course, the boom wasn’t meant to last forever, and now that economies are reopening and people have more options for what to do with their time and money, the growth in home improvement spending is coming to an end.

Nevertheless, the slowdown in growth should not make investors forget about this dividend stock.

Image source: Getty Images.

Home Depot expects sales growth to end in 2022

Since the outbreak two years ago, Home Depot sales have increased by $40 billion. In its 2021 fiscal year, which ended Jan. 30, sales totaled $151 billion, up 14% from the previous year. People who spend more time at home have found plenty of projects to do around the house.

Painting rooms, adding a garden and creating a home office were popular activities at the start of the pandemic. Revenue rose by a double-digit percentage for Home Depot in two consecutive years, after not doing so once in the eight years before the outbreak.

Management expects the above-average growth to end in fiscal 2022. It has guided investors to seek stable earnings for the year. When you consider that inflation is driving up the prices of many items sold by Home Depot, it looks like consumers are likely to buy fewer items than they did a year ago.

This is understandable. There are only a limited number of rooms you can paint and a limited number of spaces in your garden. However, slowing sales growth is no reason for Home Depot shareholders to panic.

The Home Depot dividend is not in danger

Chart showing Home Depot's EPS growth since 2014.

HD EPS Diluted Data (TTM) by YCharts

The Home Depot reported earnings per share (EPS) of $15.53 in fiscal 2021, and management expects it to grow even higher in 2022. To put that into perspective, it’s more five times higher than reported EPS in 2013.

Profits are essential for many reasons, but especially for dividends. Without sufficient revenue to support the payment of a dividend, the company would run out of savings and exhaust its borrowing capacity. Home Depot’s strong earnings mean it can sustainably pay out its healthy and growing dividend.

Indeed, examining Home Depot’s dividend payout ratio, which measures the percentage of earnings paid out as dividends, reveals that the company has room to expand its dividend payout over the next few years.

Chart showing Home Depot's payout ratio rose in 2020 and then fell again.

HD Payout Rate Data by YCharts

Income investors attracted to Home Depot because of the dividend need not worry about slowing sales growth. Even with stable revenue expected in 2022, Home Depot is increasing its earnings per share. Additionally, it pays out less than 50% of earnings in dividends, highlighting a large cushion to support the payout in the event of earnings declines.

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Parkev Tatevosian has no position in the stocks mentioned. The Motley Fool owns and recommends Home Depot. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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