Home Depot (HD) Shows America 1.0 Cracks
America 1.0 is in trouble.
Take one of our Blacklist companies: The Home Depot (HD). [To unlock the full Blacklist of 100 America 1.0 companies to sell, check this out.]
It’s like I told you last week … the cracks are showing.
HD reported earnings and here’s what I noticed that you might not see in mainstream media headlines.
The company is borrowing money, buying back stock and issuing dividends from debt. It’s not the only big company doing this.
If you want our opinion, if you’re investing in blue-chip companies (America 1.0), get out.
America 1.0 is dead, done and dusted.
But here’s the good news: America 2.0 growth stocks don’t have this problem. The Great Reversal is coming. See how:
I woke up this morning and I did it again. I cut my head while shaving. If you see that spot there, I am going to save the beanie for another week and just say don’t look at it one more time. I am going to be more careful on days when I make these videos so I don’t have to come and explain it.
What’s Going On With Home Depot?
This morning I also saw something and said, “I have to talk about this.” It’s a perfect follow up to the video I did last week when I explained to you that America 1.0 is in deep trouble. It’s not reflected in the stock market. It’s not well understood by people. It’s not being reported by the financial media.
It’s going to be the story when people look back at this moment three months out and six months out. Stick with me. If you didn’t watch last week’s video, go watch it. It has a direct relationship with what I am talking about today.
This morning Home Depot — everyone knows this is the big box, home improvement retailer — reported. If you check mainstream financial media you will know one thing: They raised their dividend by — I forget the number — 16%? It was some big number that was celebrated by everybody.
But underneath the headlines is disturbing news that goes to the heart of what I talked about last week, which is that America 1.0 is in trouble. If the Federal Reserve wants to increase rates as the market seems like it’s going to be, America 1.0 is dead, done and dusted.
They are not going to make it. I am going to show this to you.
This first image is from Home Depot’s statement of cash flows. I circled the date, which is January 2022. This is the most recent quarter. In red, I circled net cash provided by operating activities.
This is in billions of dollars. You can see Home Depot generated $16.571 billion in what would be called operating cash flow. Here is the issue for Home Depot and companies like this: They are simply not making enough money for the capital commitments they have made for their shareholders and that the stock market is currently discounting into their stock price.
The second image is from a part of the statement of cash flows.
It’s from the cash flows from financing activities. You will see that I have circled on the first line “repurchases of common stock.” Home Depot in 2021 repurchased $14.81 billion worth of stock.
Then on the second line you will see it also paid out dividends of $6.985 billion. There’s one more thing I want to point to before I come back to the first thing I started with.
The third image here is from Home Depot’s statements of earnings. In it, the one line I want you to look at is for the year they paid out interest of $1.35 billion approximately.
If you add it all up, if Home Depot was generating enough money out of its operations, they would cover their dividends, their stock buybacks and the amount of interest they are paying on their bonds. But remember, they generated $16.57 billion.
Just to make things easy for everyone to understand, I am going to round higher. So they bought back $14.8 billion worth of stock. Immediately, they have almost used up nearly all the $16.5 billion. There’s only $1.7 billion left from the cash flow from operations.
They paid out $6.9 billion. So they are already in a deficit by over $5 billion. They have wiped out all their cash flow simply by buying back stock. Where are the dividends being generated? It’s from debt. It’s from their cash balance. That’s not something you want to see.
You want companies to be paying their dividends from their cash flow. You want them to be buying back stock from their free cash flow. In other words, their operations are generating so much money that you have all this extra money and buy back stock because you have no use for it.
You don’t need to use it for maintenance, expansion or growth. However, the last place you want them to be funding all this from is the bond market. In other words, borrowing. You are borrowing money, buying back stock and dishing out dividends to shareholders.
If you go back to last week’s video I told you why this is a problem. The bond market is seeing the troubles at companies like Home Depot, Clorox, 3M, Honeywell and others are going to be reporting this. They are starting to sell corporate bonds away.
These Companies Are Brewing Up A Major Problem!
I also showed you how bond market investors, who are very sophisticated, are buying insurance against this credit risk. You may think these are just three or four companies and it’s not such a big deal. My colleague Ian did a screen for companies that cannot cover these three things: stock buybacks, dividends, interest income.
He came up with this list.
I have to say, if you looked at this list, these are big companies. I’m not going to read them all, but I am going to read some of the highlights. Proctor & Gamble, blue chip stock and nobody thinks there’s any risk in this. Home Depot, Oracle, Union Pacific, American Express, Honeywell, Altria, Cigna, Sherwin Williams.
You can go look. These are blue chip companies that so many people think are 100% safe, that there is no risk. There’s a major problem brewing with these companies, related to the fact they have been using the bond market to borrow money.
They have been taking that money and recycling it and sending it to shareholders through dividends and buybacks, which keeps their stocks at very high levels. They are not generating enough from their operations to pay for the interest that these bonds demand they pay for regularly.
And there is a problem brewing in the bond market where they, in all likelihood, can’t borrow additional money. Or the price is so high that people are going to look at their existing bonds and say, “You aren’t able to pay interest on your existing bonds, how are you borrowing more? We don’t want to lend you more.”
Here’s why this matters to us. The narrative that’s been running the market is inflation is high, the Fed is going to raise rates, that’s bad for growth stocks. Hence, short growth stocks. The truth is the opposite. Growth stocks have none of these problems.
They don’t pay dividends. Love it or hate it, they don’t pay dividends. They don’t buy back stock because they are growing too fast. They want to take the money that their operations generate and put it back in the companies. They have real growth, unlike these companies.
One of the reasons these companies are struggling to pay dividends from operating cash flow or operations is that they don’t have enough growth. Our companies have plenty of growth and they are not exposed to the risk element of the market, which is the bond market.
The bond market is about to shut out a number of these America 1.0 companies. As things stand right now, we’re at this moment that’s different. In the IanCast I called it a weird brew. There’s plenty of cash in the market. Usually into a period when there’s a problem with a set of companies, people buy bonds.
Why Are Growth Stocks A Safe Place To Invest?
Except, that’s a problem part of the market, so people are not going to buy bonds because they are selling bonds. Cash is plentiful, so people don’t need it. There aren’t that many places you can go. If you are looking to hide and step away from risk, the place you would go — opinion, not advice — is growth stocks.
Why? They have plenty of cash. They have growth. They don’t borrow from the bond market. They don’t pay dividends. They don’t buy back stock. Largely, they don’t owe interest payment because they don’t have any borrowings because younger companies bond market don’t like to lend to.
They don’t have the long track records that bond investors like to lend into. From my perspective, the Federal Reserve is going to come to understand they are going to start locking out some of the biggest, well-known companies out of the bond market.
They are going to see that a significant amount of the S&P 500 has a problem. They are going to be forced to backtrack their plans. Certainly in terms of the number of rate increases and certainly the speed. The market will get a sniff of this sooner rather than later and start to sell down the stocks of these kinds of companies, like Home Depot, Clorox and Honeywell.
Simultaneously, they will come and bid our stocks higher. That’s what I believe is going to unfold. The market is set up for this. It hasn’t yet unfolded. Nonetheless, things can change very fast. I wanted to do this analysis to illustrate what I was talking about last week.
I believe things are going to get better. I am still very bullish, optimistic, positive. Be strong hands. If you like this video, come back next week. Until then, this is Paul saying bye.
Editor, Profits Unlimited