Summary
- Domino's Pizza, Inc. and The Home Depot, Inc. have delivered strong dividend growth, well above the market average.
- These two were hit in 2022 as pandemic spending and free money ended.
- However, the declines make them more interesting plays going forward at better valuations.
Written by Nick Ackerman. This article was originally published to members of Cash Builder Opportunities on January 10th, 2023.
Reinvesting dividends and investing in dividend-growth stocks are two ways to grow your income over time passively. This can help combat the negative impacts of inflation by helping keep your purchasing power above inflation levels. Inflation hasn't been a problem in most of the last decade, but 2022 changed that. Although inflation has been coming down now, the benefit of dividend growth doesn't disappear; it just becomes even more attractive.
This is beneficial not only for retired investors but also for those in the accumulation phase of their life. During accumulation, it is a way to take a more hands-off approach and let investments work for you in the background over many years. Both investor types also benefit from the fact that many dividend growth stocks tend to be more mature, financially stable investments. So that can be a bonus on top of the passive income growth they provide.
Dividends don't rely on the stock market doing well. They follow the profits. In 2022, the S&P 500 (SP500) saw dividend payouts increase by 10.8%. That's despite having the worst performance since 2008. It was the best dividend growth since 2014, which clocked in at 12.72% year-over-year growth.
Overall, the dividend yield for the index was 1.74%. Of course, this rose in the last year not only from the dividend payout increases but also from the price decline.
Today, I wanted to look at two companies whose stock prices were hit pretty hard last year. These two are also historically exhibiting higher-than-usual dividend growth thanks to their higher-than-usual earnings growth. They also both happen to announce their dividend increases in February usually. So we won't have to wait too long for these anticipated announcements.
Domino's Pizza, Inc. ( DPZ )
Shares of DPZ slid 37.88% in 2022.
However, just looking at that specific timeframe alone could be missing the bigger picture. DPZ shares had done exceptionally well over the prior years even despite this big hit. In particular, the pandemic helped make a massive leap in the stock price.
A declining stock price doesn't always automatically make a stock worth investing in. That large move has pushed the shares to trade well below their historical P/E range of around 25.5x to 28x. The forward P/E is coming in at 23.44x. On that basis, it would indicate that there is some meaningful upside.
That pandemic-style play was unwinding in 2022, and earnings are taking a hit as stimulus money is drained, and people are no longer stuck indoors. It appears that most analysts believe this will be a small blip in the longer-term trajectory. Ultimately, EPS growth should pick up once again with new store opening and entering new markets.
DPZ has put up dividend growth for 9 years. A relatively short period of time compared to some other dividend growth stock choices out there.
The 5-year CAGR comes in at a mouthwatering 19.05%. The pace slowed in the latest year when it announced a 17% increase last year. I don't know about you, but I would still find that quite compelling especially given the uncertainty in the future.
With a payout ratio of 34.30%, they have plenty of capacity for another monster boost, but I wouldn't blame them for being more conservative heading into this year. For 2023, most expect a recession, which could hit DPZ on earnings once again to bring down their anticipated growth. This is certainly a consumer discretionary play; while it's food and everyone has to eat, it isn't essential food that consumer staples provide.
Dividend estimates show that we could hit a $4.82 annual payout this year, which would mean a $1.20 quarterly dividend or an 8.33% boost. I'm certainly more optimistic than that. My best guess is we get a 12 to 15% increase. That translates into $1.23 to $1.26 per quarter. With a dividend yield of 1.32%, we see a yield lower than the broader market, so being compensated with higher growth is the payoff.
I would base this on the trajectory of increases and noting the slowdown of more recent years. I also suspect that, given the estimated EPS, it wouldn't be too large of a leap. 2023 should be a year of stabilized earnings and returning back to growth. An additional factor is the low dividend payout.
The Home Depot, Inc. ( HD )
HD similarly benefited from the pandemic as people were stuck inside; it was a great time to get projects done that they'd been meaning to do for years. The hit in 2022 wasn't as hard compared to DPZ. In this case, it was more similar to the overall market hit as measured by the S&P 500 being down around 19.4%.
We see a similar trajectory regarding the fair value P/E range that we saw for DPZ - a spike followed by a fairly sharp decline. That sharp decline represents the decline in the prior year. The fair value P/E range for HD comes in at around 22x to 24x. So, it isn't as richly valued historically as it was for DPZ, either. This makes sense because HD is actually a slower grower, relatively speaking. However, at a forward P/E of just ~19x, it would also indicate that we could see some upside from here.
Analysts expect EPS to grow slowly but steadily over time. While not showing tremendous growth, sometimes slower but more consistent growth can be just as sexy.
HD has been growing its dividend for 13 years while paying out a dividend for 21 consecutive years.
The growth here is quite impressive, with the 10-year CAGR coming in at a blistering 20.68%. The last 5-year CAGR was 16.38% - rivaling what we saw with DPZ above. Last year's boost was good for a 15.15% increase. Again, we are seeing a slower pace in the latest year.
The payout ratio here is 45.81%, so we are more elevated but not anywhere near a danger zone at all. The latest dividend yield comes to 2.39%, well above the S&P 500 but still being able to outpace the dividend growth is impressive.
The dividend estimates for HD would put the dividend at $8.05 in their new fiscal year or $2.01 per quarter. That works out to an increase of less than 6%. So similarly to DPZ, I believe that the dividend hike will be better than the consensus despite the anticipated headwinds. My best guess here would be around a 10% increase. At least, that's a level I think seems realistic. It's also closer to the 3-year CAGR of 11.79%.
Conclusion
On a final note, between these two, they've been doing more than returning excess capital to shareholders through dividends. Both of these names have been buying back their shares. DPZ has been more aggressive in this case, but both have eliminated around a third or more of their outstanding shares in the last decade.
Both Domino's Pizza, Inc. and The Home Depot, Inc. were hit hard in 2022, but that was after making some massive runs higher in the prior years due to the pandemic. I believe they are now representing fairly attractive times to consider investing for the long term. With the added benefit that these two can continue providing strong dividend growth in the future - even if it is a bit slower with a recession is expected. A dollar-cost average approach could be an appropriate way to ladder in for the patient investor.
For further details see:
2 Stocks With High Dividend Growth