In the past five years, shares of Home Depot (HD 1.03%) produced a total return of 90%. This is a respectable gain. However, it lagged the 102% total return of the S&P 500. It doesn't help that Home Depot currently trades 20% below its peak price.

Investors are probably wondering what the future holds. Where will this top retail stock be in five years? Let's seek to find out.

Getting back to growth

During its fiscal 2024's first quarter (ended April 28), Home Depot reported a 2.8% same-store sales drop. This was after the company posted a 3.2% decline in fiscal 2023. These data points are certainly discouraging. They indicate weaker consumer spending habits, particularly as they relate to big-ticket items. High interest rates and ongoing inflationary pressures also probably deserve some blame.

But the company's recent slowdown is likely just a temporary setback, in my view. Demand was very strong during the depths of the pandemic, with Home Depot reporting double-digit revenue growth in fiscal 2020 and 2021. This was much better than the rate in previous years. We could simply be seeing a normalization following those above-average gains.

If we zoom out over the next five years and beyond, it's not hard to be optimistic. Home Depot, which raked in $152 billion in revenue over the past 12 months, is the leader in the $1 trillion home improvement industry. But despite this massive scale, it only commands about a 15% market share.

There still appears to be a sizable runway for the business to grow its sales base, especially since it has the brand recognition, broad inventory assortment, and omnichannel capabilities that smaller rivals might not possess. These attributes should allow Home Depot to better serve its customers.

Other favorable industry tailwinds relate to the housing sector. There is a shortage of homes in the U.S., which means there aren't enough new houses being built to satisfy demand. This situation encourages people to focus on home renovations, supporting demand for Home Depot.

Moreover, the median age of a home in this country is 40 years old. That figure is up from 31 in 2005. As this trend likely continues, it could lead to more maintenance activity. I'm confident that five years from now, Home Depot's sales and earnings will be higher than they are today.

Returning capital to shareholders

Home Depot is a financially sound enterprise because it is consistently profitable. The business generated $17.9 billion of free cash flow in 2023. This is the money that's left over after reinvesting in new stores or distribution facilities.

That cash production affords management the ability to return lots of capital to shareholders. In fact, you'd struggle to find companies that do so more than Home Depot.

During the three-year stretch between fiscal 2021 and 2023, the business paid a total of $23.2 billion in dividends. And it repurchased a jaw-dropping $29.5 billion worth of shares. Over the next five years, investors can expect these moves to continue, which will only help to boost returns.

Look at the stock

As of this writing, shares of Home Depot trade at a price-to-earnings (P/E) ratio of 22.3. That's almost identical to the trailing-10-year average valuation, but it's a slight discount to the P/E multiple of the overall S&P 500.

Investors might view this as an indication that the stock is reasonably valued. I think it provides prospective shareholders with a chance to buy an industry-leading business that can beat or at least match the performance of the broader market over the next five years.