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Investors should reconsider their purchases of stocks, despite an anticipated stock split.

Investors Might Want to Pause Purchases of Stocks Despite Anticipated Stock Division
Investors Might Want to Pause Purchases of Stocks Despite Anticipated Stock Division

Investors should reconsider their purchases of stocks, despite an anticipated stock split.

The thought of avoiding purchasing Home Depot (HD with a 0.62% decline) might seem illogical given its impressive record of returns (a total return of 421% over the past decade compared to the S&P 500's 250%). Its historical dividend growth has been beneficial for numerous investors, providing additional income beyond its stock price appreciation.

However, the current discourse surrounding the stock implies that buying right now may not be as straightforward as usual. There seems to be pressure for a stock split for Home Depot, but this push is more likely driven by political motives rather than financial necessity. Even if the company announces a split, it might not be advantageous for investors to invest more shares at the moment. Here's why.

Home Depot and stock splits

Home Depot was once a rapidly expanding enterprise, but that growth tapered off.

Initially listed in September 1981 with a few stores in metro Atlanta, Home Depot expanded rapidly post-IPO. After starting with two stores in 1979, it opened its 1,000th store in 2000 and exceeded 2,000 stores by 2005. However, growth slowed down in 2005 as the company neared a saturation point in the US and Canada. Since then, Home Depot has operated 2,345 stores as of the end of the third quarter of 2024.

Home Depot's history of stock splits is divided into two eras. The company executed 13 splits between 1982 and 1999. Since 1999, there have been no splits. The reason for this lies in Home Depot's decline during the 2000s as it transitioned from a growth stock to a value stock. Additionally, concerns about the future emerged after its expansion attempts in China and two South American countries fell through. Despite operating 137 stores in Mexico, its volatile business environment makes expansion there uncertain.

Home Depot's dividend continues to be its strength. Initiated in 1987 at a split-adjusted rate of around $0.0015 per share annually, it has grown to an annual level of $9 per share by 2024. The board has approved dividend hikes in most years, and the company has managed to grow its payout by identifying additional revenue opportunities in existing markets.

However, the company's revenue performance, particularly post-pandemic, has raised concerns. Net sales grew by only 2% in the first nine months of fiscal 2024 (ended Oct. 27) compared to the previous year. For fiscal 2024 and 2025, analysts predict net sales rising by less than 4% in each year.

Unfortunately, this sluggish revenue growth seems to be a recurring pattern. Net sales declined by 3% annually in fiscal 2023 and grew by 4% in 2022. Consequently, Home Depot's total return has lagged the S&P 500 over the past three years.

To find a year with double-digit net sales growth, one needs to look back to fiscal 2021, where pandemic conditions led to a 14% annual increase in net sales. This performance suggests that the company may find it challenging to grow significantly without exploring new markets.

Why is there a possible stock split for Home Depot now?

Despite the recent slower revenue growth, the main reason for the potential stock split is the overall growth post-financial crisis. Since the 2009 bear market bottom, Home Depot's stock has significantly increased (over 2,100%), reaching over $400 per share. Some believe that price makes Home Depot a split candidate, but there are nearly 100 stocks trading at a higher nominal price on U.S. indexes. The high price is not the sole reason.

Investors tend to overlook Home Depot's inclusion in the Dow Jones Industrial Average as one of its 30 component stocks since 1999. The DJIA is a price-weighted index, meaning a higher nominal stock price has more influence in the index. Among the Dow 30 stocks, only UnitedHealth, Goldman Sachs, and Microsoft have higher stock prices. Consequently, some want the split to reduce Home Depot's influence on the Dow. This political motive is playing a significant role.

Other reasons for a possible split include making Home Depot stock more affordable for retail investors who cannot buy partial shares. Additionally, a lower stock price makes it easier to buy covered calls (which require buying in 100-share lots) and benefits employees with stock options as compensation by reducing exercise costs.

Should you stay away from Home Depot stock?

Home Depot's past dividend growth makes it a reliable option for long-term investors. Its organic growth in existing markets will likely warrant continued dividend increases, making it an attractive choice for income investors.

However, with few new growth prospects, it is unlikely that Home Depot stock will attract significant buyer interest, even with a lower, split-adjusted price. Therefore, investors should treat this stock as a hold.

Despite the push for a stock split due to Home Depot's high stock price and its influence in the Dow Jones Industrial Average, financially-driven reasons may not make it advantageous for investors to invest more shares at the moment. In fact, the current discourse suggests that Home Depot's revenue growth, particularly post-pandemic, has been sluggish, raising concerns about its future performance. As a result, potential investors might consider other opportunities in the realm of money management and investing.

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