American consumers are spending more on their homes than ever before. Here's how investors can profit.
September 13, 2021
Fueled by low-interest rates, a dramatic rise in home equity, and persistent pandemic fears that led to people staying in, American consumers are spending more on their homes than ever before. Home Advisor proclaimed 2020 “The Year of the Home” (link opens PDF) and released some revealing numbers in its annual survey. In 2020, the average household spending on home services projects rose to $13,138, a 45% increase over 2019’s total. The number of home improvement projects per household rose to 2.77, a 25% increase over 2019.
While some of these gains might be temporary, driven by consumers stuck at home during the worst of the pandemic, there are plenty of indications that this home improvement spending boom has a ways to go yet. The National Association of Homebuilders (NAHB)/Royal Building Products Remodeling Market Index (RMI) is based on a quarterly survey (link opens PDF) of NAHB remodeler members that provides insights on current market conditions and future indicators for the remodeling market. The survey asks remodelers to rate different aspects of the market. A score over 50 in any given area is generally considered good. This quarter, the survey hit all-time highs with questions about job leads and current backlogs scoring 81 and 86, respectively.
Here are three companies that should benefit from this trend and have a history of paying and raising dividends.
What makes Home Depot (NYSE: HD) a long-term buy-and-hold investment is its relationship with Pro customers, or “professional renovators/remodelers, general contractors, handymen, property managers, building service contractors, and specialty tradesmen, such as electricians, plumbers, and painters.” While Pros are only 4% to 5% of Home Depot’s customer base, they make up almost 50% of Home Depot’s sales. That’s because Pro customers make more frequent purchases and buy big-ticket items ranging from flooring and lumber to bathroom and kitchen fixtures.
Home Depot has targeted the Pro community by offering 1-day delivery to most of the United States and building out a loyalty program and website for the exclusive use of these customers. When talking about its business-to-business (B2B) website on the last conference call, COO Ted Decker said:
[W]e are building a B2B website, and all of our Pro Extra members now have been transferred over to that B2B experience. So with the combination of the benefits that you’re getting with Pro Extra — we’ve stood up a separate Pro Extra app that those Pros are using — and the ability to engage on the B2B website, which has all sorts of functionality built out specifically for the Pro, so think of bills of material for jobs, tracking jobs, quotes, building quotes, reorder capability, tracking all receipts, preferred pricing in certain instances, all of that is coming together as well as personalization and building relevance on that Pro B2B website.
While some of Lowe’s (NYSE: LOW) quarterly numbers were slightly down on a year-over-year basis, that’s more because of the massive surge in sales it experienced during the worst of the pandemic in the second quarter of 2020, making comparable sales figures challenging. Its two-year growth numbers are still outstanding. The home improvement giant’s comparable sales grew 32% on a two-year basis. Pro sales, a category where Lowe’s has traditionally trailed its Home Depot rival, increased 49% over the past two years. Lowe’s online sales have also experienced tremendous growth, growing 151% over the past two years and now represent 9% of the company’s total sales.
During the company’s second-quarter 2021 conference call, CEO Marvin Ellison reiterated that the home improvement market’s outlook was very positive:
The outlook for the home improvement industry remains very positive. Residential investment is expected to remain high due to historically low mortgage rates while home prices continue to appreciate. We’re also pleased that we continue to see higher household formation trends and longer-term wallet share shift to the home. It’s also worth noting that any near-term pressures on housing turnover is not related to an economic downturn as typical. In fact, there is more housing demand than supply, resulting in home prices continuing to rise. And because of this, consumers have an increased confidence in repairing and remodeling their homes. As a reminder, approximately two-thirds of Lowe’s annual sales are generated from repair and maintenance activity.
RPM International (NYSE: RPM) sells a variety of popular coatings, adhesives, and paints, broken down into four business segments:
These products are diverse and can be used in a wide variety of home improvement and maintenance projects. Despite supply chain disruptions and raw material shortages, both of which impacted RPM’s results, the company reported record-high revenue and earnings in its fiscal 2021. The year saw $6.1 billion in sales, a 10.9% jump year over year, and adjusted EPS rose to $4.16, a 35% increase over 2019’s total.
During the fiscal year, the company concluded its MAP to Growth program, an operational improvement program, which significantly expanded its margins. CEO Frank Sullivan commented on MAP, saying:
At the program’s onset, we recognized that RPM had reached the point where a center-led approach in selected areas of the business was required to take it to the next level of growth. In manufacturing, we formed a center-led team that has created a lasting culture of manufacturing excellence and continuous improvement disciplines across the organization. This team launched our MS-168 manufacturing system, which is allowing us to produce better products more quickly, more cost-effectively, and more sustainably. In addition, we reduced our global manufacturing footprint by 28 facilities, consolidating production to more strategically advantageous plants.
These three companies offer investors a way to profit from this trend without risking a lot of capital if it fizzles out sooner than expected. All three companies have proven track records of growing profits, paying dividends, and buying back shares to compensate investors. Whether there is a housing bubble or not, expect all three to reward shareholders with market-beating returns over a long time horizon.
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