Guest Post by Sure Dividend: Deere & Company Stock Analysis

This is a guest post by Ben Reynolds.  Ben Reynolds runs Sure Dividend.  Sure Dividend is focused on identifying and ranking high quality dividend growth stocks suitable for long-term holding.

Deere & Company (DE) is one of Ryan’s holdings in his Share Builder Taxable & ROTH IRA Accounts.  The stock is also highly ranked using The 8 Rules of Dividend Investing.  This article analyzes Deere & Company’s operations, dividend payments, and valuation.

To say Deere & Company has a long corporate history is an understatement.  The company was founded in 1837.  Deere & Company has grown to a market cap of $31 billion thanks to its reputation for manufacturing high quality farm equipment.

Business overview

Deere & Company divides its operations into 3 segments:  Agriculture & Turf, Construction & Forestry, and Financial Services.  The percentage of operating income each segment generated for Deere & Company in its most recent quarter (the first quarter of its fiscal 2015) is shown below to give an idea of the relative importance of each segment to Deere & Company:

  • Agriculture & Turf:  41% of operating income
  • Construction & Forestry:  23% of operating income
  • Financial Services:  36% of operating income

The agricultural equipment industry is highly cyclical.  Low crop prices have driven agricultural equipment sales down; agricultural equipment sales are currently in a down cycle.  As a result, the relative importance of the Agricultural & Turf segment is actually understated by the numbers above.

Deere & Company generated 70% of its operating income from the Agricultural & Turf segment in full fiscal 2014.  When crop prices are not depressed, the company generates the bulk of its operating income from sales of its agricultural equipment.

Deere & Company’s management has aggressively expanded the company’s presence in construction and forestry equipment and financial services.  As a result, the company will experience less severe earnings drawdowns during down cycles in the agricultural industry than it has in the past.

As an example, the company saw operating income in its Agriculture & Turf segment fall by 66% in the first quarter of 2015 versus the first quarter of 2014.  Total operating income fell 38%, as operating income from the company’s other two segments partially offset declines in its Agriculture & Turf segment.  The company’s CEO Samuel Allen had the following to say about first quarter 2015 results:

Deere’s first-quarter performance reflected sluggish conditions in the global farm sector, which reduced demand for agricultural machinery, particularly larger models, and led to lower sales and income.   At the same time, our construction and forestry and financial services divisions had higher profits, showing the benefit of a well-rounded business lineup.  Deere’s results also demonstrated the progress we’ve made creating a more flexible, responsive cost structure.

Growth Prospects

The cyclical nature of Deere & Company’s earnings has obscured the company’s excellent growth.  From 2005 through 2014, Deere & Company has grown quickly:

  • Revenue per share CAGR of 9.9%
  • Earnings per share CAGR of 12.7%
  • Dividends per share CAGR of 15.4%

The company’s dividend CAGR of 15.4% means it has doubled dividend payments every 5 years.  This is excellent growth – especially considering the down market from 2007 to 2009.  The company has a low payout ratio of 22%, giving it room to continue growing dividends slightly faster than earnings-per-share growth.

2015 will not be a good year for Deere & Company.  Low grain prices reduce farmers’ purchasing power.  This leads to fewer purchases of new farm equipment, which reduces Deere & Company’s income.  The company is expected to generate about $5.50 in earnings-per-share in 2015, well below earnings-per-share of $9.08 in 2013 and $8.63 in 2014.  This decline is due to expected lower grain prices.  The image below shows the price history of 3 key grains over the last several years.

Commodity PricesOver a multi-year, I expect Deere & Company to reward shareholders with double-digit earnings-per-share growth.  The company has managed this over the last 10 years.  Earnings growth will be irregular, however, and will correspond with rising and falling grain prices.  Rest assured, grain prices will not stay low forever.  When they rise, Deere & Company will benefit.

Valuation

The expected weakness in Deere & Company has drive down the company’s price-to-earnings ratio.  Deere & Company has a current price-to-earnings ratio of just 10.9.  The company’s forward price-to-earnings ratio is 16.6.  Using either number, the company appears undervalued considering its long-term earnings-per-share growth rate of 12.7%.

Dividend Analysis

Deere & Company has paid steady or rising dividends each year since 1987.  The company currently sports a 2.6% dividend yield and has a payout ratio of just 22%.  The company’s low payout ratio gives it a wide margin of safety to withstand recessions and continue paying dividends.

Deere & Company currently pays out $2.40 in dividends.  The company has over $11 per share in cash on hand.  Deere & Company’s lowest earnings per share over the last decade was $2.82 in 2009, during the height of the Great Recession.  The company’s dividend is extremely safe.  Deere & Company’s conservative payout ratio gives it substantial room to grow its dividend payments faster than overall company growth over a multi-year period.  The company has grown dividends faster than earnings per share over the last decade, and will likely continue to do so in the future.

Final Thoughts

Deere & Company is the second largest corporation in the farm and construction industry, behind only Caterpillar (CAT).  The company has a reputation for selling high quality equipment, which often commands a premium price.

Deere & Company is very shareholder friendly.  The company has paid steady or rising dividends each year since 1987.  The company has reduced its share count by over 3.4% a year on average over the last decade.  The combination of rising dividends and share repurchases gives shareholders much to be happy about.

The cyclical nature of the agricultural equipment industry has driven down Deere & Company’s share price and earnings.  Over long periods of time, the company has proven it can generate double-digit earnings per share growth while growing dividend payments.  Deere & Company ranks highly using The 8 Rules of Dividend Investing because of its high long-term growth rate, long dividend history, low payout ratio, and low price-to-earnings ratio.  I believe the stock is a buy for patient investors who can wait out current low grain prices.

My Dividend Growth

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8 thoughts on “Guest Post by Sure Dividend: Deere & Company Stock Analysis
  1. Dividend Mantra

    Ryan and Ben,

    DE looks great for the long haul, though not without short-term headwinds. I’m certainly glad I didn’t sell out when people were talking about Buffett “selling” last quarter, as it turns out he didn’t sell at all. He was actually buying more. You’ve gotta think independently. 🙂

    Best regards!

     
    Reply
    1. My Dividend Growth

      You’re right on point as always, Jason…AND you are one of the most independent thinkers I have the privilege of knowing 🙂 I love this company, but I mentioned to Ben that I had been feeling nervous about my entry prices. He did a great job in the article reminding me to think long-term even though I think I payed a bit too much. Rather than selling and hoping and wishing for a decline, I look forward to keeping the cash flow and averaging down on a decent pullback. This seems like a perfect Buffett type business, and it’ll be interesting to see if BRK ever offers to buy it outright. Perhaps any coming up volatility will present an opportunity. Hope you’ve had a great week so far, it’s good to hear from you!

      All my best,
      Ryan

       
      Reply
    2. benrreynolds

      Yes, I know many people ‘lost interest’ in DE when Buffett fake-sold the company. It is usually a good idea to buy high quality businesses in cyclical troughs, and that is what DE is right now.

       
      Reply
  2. Dividend Gremlin

    MDG,

    I really like DE, and wish I had them already. I really like any heavy equipment company and I only foresee a lot of continued construction and farming – here and everywhere else. Look at booming populations – more food needed. Our infrastructure is in need of a serious overhaul too. DE, CAT, and the rest will be there with their equipment to do it.

    If short term headwinds on commodity prices continue, nice opportunities might pop up. One can hope.

    – Gremlin

     
    Reply
    1. My Dividend Growth

      I couldn’t agree more, Dividend Gremlin. This is one of those iconic American businesses that deserves a place in most portfolios. It was one of my earlier investments and I got in just before all the extreme negative forward guidance, but I’m sure if I had dug deeper and looked at grain prices like Ben posted I could have seen this coming. Part of the learning process and these headwinds come with the territory of owning DE and its cyclical nature. I really enjoyed this post by Ben and I’m thinking very-long term on this one. Congrats on your recent pickup of CB, btw! That’s a great company 🙂

      Best,
      Ryan

       
      Reply
  3. FI Investor

    Very good analysis! I don’t personally have any shares of DE yet but I have had them on my watchlist for some time now. I am playing the waiting game until this summer and waiting for a pullback to pull the trigger.
    Keep it up!

     
    Reply

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