This Home-Remodeling Titan Looks Strong After a 2019 Housing-Market Rebound

Another "World Dominator" is shining in its industry...

Our colleague Dan Ferris coined the term World Dominators to describe some of the best companies in the world.

These are companies that dominate their industries. They have the best brand names and the biggest competitive advantages. They can raise prices to stay ahead of inflation, or use their enormous size to keep costs lower than everyone else in the industry.

They also have consistently strong profit margins, gush free cash flow, and possess rock-solid balance sheets.

All this makes World Dominators some of the safest investments in the world.

Today, we're looking at a World Dominator of the housing market.

After a rough end to 2018, housing data began to improve in 2019. Mortgage rates are sitting near three-year lows. New home sales, building permits, and housing starts all hit levels not seen since 2007. The SPDR S&P Homebuilder Fund (XHB) rose more than 30%.

Many expect this strength to continue into 2020... And that's great news for today's World Dominator.

Home Depot (NYSE: HD) is the biggest and the best in the home-improvement industry.

Its warehouse-like stores are a one-stop-shop for any home-improvement or remodeling needs.

As of October 2019, it had nearly 2,300 stores across North America.

With around $110 billion in annual sales, Home Depot is more than 50% larger than its only significant competitor, Lowe's (a company that has done its best to copy Home Depot). And its market cap is more than $250 billion, more than double that of Lowe's ($95 billion).

One of its key advantages is its supply chain.

Keeping in-demand products in full stock all the time is one of the greatest challenges in retail.

But Home Depot knows how to keep the shelves stocked at all times... It cut out the middleman and built its own distribution centers to cut costs as spending on discretionary items (like a remodeled kitchen) collapsed in 2007 and 2008.

To help with this, Home Depot built Rapid Deployment Centers ("RDCs").

Instead of manufacturers shipping directly to Home Depot stores like they used to, these orders would now flow through RDCs.

Large pallet loads come into an RDC from vendors, are quickly broken down into case-level shipments, cross-docked onto company trucks, and delivered to individual stores. Each RDC serves about 100 stores.

By doing this, Home Depot can better forecast what each store needs, and when.

That means there's less general "stuff" sitting around on the shelves... allowing for only the "right stuff" that customers want.

Better forecasting also translates into reduced inventory in the supply chain. By incorporating RDCs into its logistics system, HD was able to reduce overall inventory.

Inventory is a major use of cash for a big retailer like Home Depot. Reducing inventory frees up that capital for better uses, like growing the business, paying dividends, or buying back shares.

So, these moves to reduce inventory only made a strong business even stronger.

And Home Depot is again reshaping its supply chain to take advantage of today's changing retail landscape.

In today's hypercompetitive retail sector, it's not enough to keep physical locations well-stocked. Customers purchase more things online and expect immediate results. Home Depot's decade of supply-chain innovation has set it up well for this kind of environment.

That's why, in 2017, Home Depot unveiled a $1.2 billion plan to offer same-day delivery and next-day delivery.

It plans to build 170 new distribution centers to reach 90% of the U.S. population with fast deliveries.

Not only does Home Depot have a great business, it likes to reward shareholders, too...

Home Depot is a world-class dividend-payer. It has raised its dividend in 31 of the past 33 years. (The dividend was kept steady in fiscal 2009 and 2010.)

The company's annual dividend payment has risen more than fivefold since 2012 – from $1.04 to $5.44 per share. Home Depot's current policy is to pay out 55% of earnings and to increase the dividend every year.

It also buys back tons of stock.

Over the past four quarters, it has bought back more than $8 billion worth of shares. It has cut its shares outstanding in half since 2003.

As for its price action, Home Depot shares have been in a strong uptrend over the past five years, more than doubling over that time frame. The stock gained more than 25% in 2019 alone, and recently hit an all-time high.

With the housing market's strong 2019 performance carrying into 2020, and its World Dominating business, Home Depot's stock should continue to perform well.

Sometimes investing is simple.