Dividend Watch: Housing, Buybacks Versus Dividends (HD, LOW, LEN)

Home Depot Inc. (NYSE: HD) may not have a great housing market to boost its shares, but the company has decided to take an unusual approach to returning capital to shareholders.  The home improvement retail giant has announced the approval of a $1 billion accelerated common stock repurchase program.  The move is part of a fresh debt offering. This is an instance where a share buyback acts as “the alternative dividend” by a company.  It may have housing segment ramifications for when the sector begins to recover.

Where this buyback is so interesting is that the accelerated share repurchase announcement is actually in addition to its prior plan to repurchase some $2.5 billion worth of its outstanding shares this year alone.  Usually we are not happy when companies issue debt to buy back stock, but the return on equity here looks much higher than its cost of funds and Home Depot has ample profits to justify what would be a leveraged move elsewhere.

We are probably going to expect some of the same sort of action from Lowe’s Companies Inc. (NYSE: LOW) ahead.  If a move works for one, the other often follows suit.  Both companies are equally off of their 52-week lows by close to the same amount.

The news of this buyback comes on the heels of a positive earnings report from Lennar Corp. (NYSE: LEN).  As you would imagine, Lennar had lower sales and the gains were due to hedging and some distressed real estate acquisitions.  Its sales were down 11%, with deliveries down 4% and average selling prices down 7%. Lennar still pays a $0.04 per share per quarter dividend to its shareholders.

As a part of the announcement, Home Depot also reiterated its 2011 earnings and sales projections with sales up around 2.5% and earnings of about $2.20 EPS before the effects of share buybacks.  If you use the full $3.5 billion in share buybacks at the Home Depot, its market cap is roughly $60 billion.  This won’t sound like much but it is not exactly as though Home Depot is anywhere close to its boom-time business in years past.  The company has also missed two full years of any real natural disaster business.

Home Depot shares are reacting positively since the open this morning.  Shares are up close to 2% at $37.45 on the day.  Lowe’s is seeing its shares up only about 0.3% at $26.80 and Lennar is actually down about 1.3% at $19.49 on the day.

JON C. OGG