Forty-five years ago next week, a four-store hardware chain in Atlanta went public because it had run out of borrowing capacity. Bear Stearns reluctantly agreed to a $6 million offering, then called a week before to say the money was not there. Ken Langone, a co-founder and board member, strong-armed the deal back to life at a smaller size. On Sept. 22, 1981, Home Depot (HD) raised $4 million at a valuation under $40 million.
David Rosenthal and Ben Gilbert of the “Acquired” podcast did the arithmetic for the Journal this weekend. A thousand dollars invested that day, dividends reinvested, is worth roughly $16 million now — the highest total return of any U.S. stock in the S&P 500 from any day since. The same $1,000 in Apple (AAPL)’s IPO, less than a year earlier, is worth about $4 million. It is not close.
How a hardware store beat every tech company
Part of it is the base: Apple came public worth over $1 billion, Home Depot under $40 million. But a small IPO usually means a small business. What Bernie Marcus, Arthur Blank, Pat Farrah and Langone understood was that hardware is not like other specialty retail. Nobody wants a power saw. They want a deck, and the satisfaction of building it, and the next project after that. A Costco (COST) customer can buy only so many mixed nuts; a $5 screwdriver at Home Depot could, and did, lead to a $100,000 remodel. The company stopped being a store and became a continuing relationship, riding on the country’s large and aging housing stock.
The second half of the strategy was the stock itself. Home Depot hired former carpenters, plumbers and electricians to staff the floor and taught them that time spent showing a customer how to tile a bathroom would raise sales, which would raise the share price, which they owned. Frank Blake, CEO from 2007 to 2014, said the best sign of a healthy store was the stock chart pinned up in the break room. Langone says 3,000 floor employees became multimillionaires. Sales passed $1 billion in 1986, $5 billion in 1991, when the market value hit $8 billion, 250 times the IPO. Today the company is worth about $300 billion on roughly $165 billion of sales.
The part that is in this week’s stock table
Home Depot closed Friday at $299.98, down 12.8% this year, yielding 3.1%. The stock has not done much for five years while technology boomed, and this year it has fallen with the housing market: the 30-year mortgage went to 6.95%, and Lennar cut its full-year delivery target this week citing rate pressure. That is the pattern Spencer Jakab’s column describes elsewhere in this edition — a decline that arrived with the sector, not with the company’s own earnings.
Our read
Three things in this story are the whole curriculum. Time: forty-five years, not four. Reinvested dividends: the $16 million includes them, and a great deal of it is them. And a business whose customers spend more with it as they age — which is the one thing a hardware store and a retirement plan have in common. The best compounder in the index was never the most exciting company in it, and the years it did nothing were the years that made the next stretch possible.
Home Depot is not in the Capital Wealth books today. At a 3.1% yield, down 13% on a mortgage rate it does not control, it goes on the watch list for the Midterm Dividend book — the flagship that is supposed to earn its keep on the way down — with the same entry rule everything else waits behind.