A Home Renovation Trend Might Be Spell Trouble For These Dividend Stocks

Summer is in full swing in the United States, which means it should be the time of year when people who don't have swimming pools dream of installing one. But recent data indicates that pools may be losing their allure, which could be bad news for two dividend-paying companies that profit from the care and maintenance of these watery oases. 

Rory McIlroy’s mansion in Florida is worth $22 million today, doubling from 2017 — here’s how to get started investing in real estate with just $100.

Part of the issue is a sharp uptick in the retail cost of installing a pool. The retail price of a pool has gone up from $43,000 to $74,000 in just four years, and the price of renovating a pool went from $10,000 to $20,000 during the same time frame. In its most recent quarterly report, pool installer Latham SWIM reported that it experienced year-over-year volume declines due to continued economic challenges. On Latham's first quarter earnings call, CFO Oliver Gloe said, "first quarter comparisons reflected the challenging macroeconomic conditions that have reduced pool starts."

Another data point to watch is that according to Google's search trends data, "swimming pool costs" in June were the lowest on record. While searches don't necessarily result in purchases, there is a case to be made that interest in constructing a pool is decreasing. 

Bad News For The Pure Play?

If you've invested in Pool Corp POOL, part of your investment thesis will likely center around The popularity of swimming pools. Pool Corp is the largest global distributor of pool-related products, including chemicals, building materials, and equipment. The home renovation trend sparked by the pandemic was good news for Pool Corp, as people stuck at home invested in their homes and backyard spaces.

Pool Corp stock was up nearly 70% over the past five years and has seen 73% revenue growth since 2019. However, year to date, the stock has been down over 19% as the market has digested the changing trend in pool construction. In late June, Pool Corp revised its guidance, lowering it to $11.04 to $11.44 per diluted share from the previous range of $13.19 to $14.19. In recent months, several analysts have lowered their price targets for Pool Corp as they watch this sentiment shift around swimming pools. Pool Corp has enjoyed a 118% increase in its dividend since 2020, rising from $0.55 to $1.10, but that upward momentum could change if sales start to drop. 

Can you guess which type of investments Morgan Stanley says will reach $2.7 trillion by 2027? It even offers up to 20% APY potential to accredited investors.

Will Home Depot's Pool Move Pay Off?

Home Depot HD isn't the first name you think of for pool supplies, but the company needs to be aware of changes in the pool industry. In June, Home Depot acquired the parent company of Heritage Pool Supply, SRS Distribution, for $18.25 billion. This deal was about far more than pools. SRS Distribution is a major supplier of roofing and siding materials and its large network of locations and trucks allows Home Depot to serve its contractor customers better. But Heritage Pool Supply is the second-largest distributor of pool supplies in the U.S., and growth in this industry will contribute directly to the acquisition’s success.

Home Depot serves two core customer bases: do-it-yourself homeowners and contractors. A decrease in big-ticket spending by homeowners on major renovations has weighed on the company recently. In the first quarter of 2024, sales were down by 2.3%. Big-ticket transactions over $1,000 were down 6.5%. 

So far, this hasn't weighed on Home Depot's dividend performance. It declared a dividend of $2.25 in May, and the forward dividend yield is 2.61%. Its dividend has increased 50% since 2020. Despite slumping sales, analysts remain positive about the company, giving it a consensus rating of buy. Analyst DA Davidson recently upgraded Home Depot from Neutral to Buy. In speaking to Bloomberg, Michael Baker, Senior Equity Analyst at DA Davidson, said that part of the reason for the upgrade was that Home Depot has been underperforming recently and that a change in interest rates may change that because "typically Home Depot stock outperforms in an environment when rates are going down."

A Blip Or A Long-Lasting Shift?

If there's anything we know about consumer habits, it's that they change. Over the last few years, people have increased their travel spending as they spend less time at home, but that could be a relic of a post-pandemic response. While home remodeling has been in a downturn recently, some signs are leveling off. The Leading Indicator of Remodeling Activity (LIRA) sees a moderating rate of overall spending. In speaking about the data, Abbe Will, Associate Director of the Remodeling Futures Program, said that the "remodeling downturn is poised to be fairly modest and short-lived with market expenditures steadying at near-record levels."

Another factor to keep an eye on is the new home market. Pool Corp sees a one-to-three-year lag between when a new home is built and when a pool is installed. In 2023, new home sales accounted for over 30% of the market, far above the 10-12% seen in most years. Much of that new development is also taking place in the Sunbelt region, where temperatures are high, which could lead to more pool demand. Both Pool Corp and Home Depot will report their second-quarter earnings soon, which may give us more insight into consumer spending habits related to home improvement. 

Check Out One Of Benzinga's Top Picks for Private Market Opportunities Available Now:

Integris Secured Credit Fund IV

The fund provides a fixed annual return of 12%, payable quarterly, over a 2-year period starting April 2024 and ending April 2026. The note is secured by collateral with an estimated value of $71M, with an anticipated loan-to-value ratio of 14%.

• Minimum investment: $100,000
• Available to: Accredited investors
• View fund information

View more private market offerings on Benzinga's Alternative Investment screener.