Friday, November 17, 2006

Home Depot's Dividend Bluff

Home Depot (NYSE:HD) announced a huge whopping dividend increase. The Chairman, CEO and President Mr. Nardelli indicated that the second dividend increase this year is a major testament to Home Depot’s strength.

"For the second time this year, the board has increased the dividend by 50 percent, reinforcing our confidence in the Company's strategic growth plans and our commitment to generate shareholder returns," said Bob Nardelli, chairman, president & CEO. "While the housing market is challenging, our strong financial discipline and clear growth strategy allow us to reinvest in our retail stores and also return cash to our shareholders."

Quite the bluff in this Poker game. Earlier this week Home Depot announced poor earnings. That’s where dividends come from. In the past few years the level of long term debt has risen from $856 million at year end 01 Feb 04 to $6,671 million on 29 Oct 06. Long term debt provides cash but hangs around for a long time and eventually becomes a drag on earnings. At the same time many board members are retiring due to age. Much expertise and valuable perspective is walking out the door. New board members will need time to get up the curve.

Home Depot is becoming a bigger bet. The dividend increase is not the signal that they would have you believe.