S&P cuts Home Depot's rating three notches

NEW YORK, July 5 (Reuters) - Standard & Poor's on Thursday cut Home Depot Inc.'s (HD.N) debt rating by three notches, saying it expects credit quality to weaken as the company uses cash to buy back shares and pay dividends.

Home Depot last month said it planned to increase its stock buyback program by $22.5 billion, paying for the purchases with about $12 billion in new debt, cash on hand and proceeds from the sale of its supply division.

"Despite still-sizable free cash flow generation, given management's new financial policy, we expect most or all of free cash flow will be used to repurchase shares and pay dividends," S&P said in a statement.

S&P cut Home Depot's corporate credit rating by three notches to "BBB-plus," the third-lowest investment grade, from "A-plus." The outlook is stable, meaning another downgrade is not expected over the next two years.

Home Depot's 5.875 percent bonds due in 2036 fell to 87.9 cents on the dollar on Thursday, down from 88.2 cents on June 28, their previous significant trade, according to MarketAxess.