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Deere & Co. (DE) is the largest manufacturer of farm equipment in the world. Who doesn’t know the color John Deere Green when they see it? Along with tractors and other farm equipment, Deere also makes a range of equipment used in the construction and forestry industries. Deere & Co. is a global company with overseas sales accounting for 41% of 2012 revenues.
Growing up on a farm, I have soft spot in my heart for John Deere. Many farm families use John Deere equipment to work the land across the country and world. Deere & Co. has a 10 year dividend growth streak. Deere is one of my personal favorites to own and also one of the companies in my Kindle book 35 Top Dividend Growth Stocks.
Dividend Growth and Current Yield
Deere & Co currently pays a dividend of $0.51 per quarter for a $2.04 annual dividend. At the close of market on Friday December 6th, DE’s price per share was $85.32. This gives the stock a current dividend yield of 3.00% (2.04/85.32).
In 2003, Deere payed an annualized dividend amount of $0.44 per share. The dividend trend has been up each year as it now pays $2.04 annually per share. This gives DE a 10 year annual compound dividend growth rate of 16.58%. More recently the annual dividend growth rate was 18% for 2011 to 2012 and 11% for their most recent dividend increase. These dividend growth rates should please the owner of Deere & Co.
Earnings Per Share Growth
Deere had a 2002 earnings per share (EPS) of $0.67 and a 2012 EPS of $7.64. Over the 10 years their earnings per share have been consistently climbing upward with just one minor bump in the road back in 2009. DE has had a 10 year EPS growth rate of 27.56% which is an excellent growth rate for such a large established company.
More recently Deere’s annual EPS growth rate was 16% from 2011 to 2012 which would please most investors. Going forward, Value Line Investment Surveys has projected earnings growth of 7.5%.
Net Income Growth
Deere has been consistently growing net profits since 2003. DE has a 9 year net profits growth rate of 18.94%. Most recently DE has increased net profits by 10% in 2012. Over the past decade, Deere & Company has been able to almost quadruple their total net profits for shareholders.
Sales have also been trending upward for Deere over the past decade. The compound annual growth rate of sales revenues was 10.76%. As you can tell, Deere & Co has been able to grow their EPS and total net profits at a faster rate than they have been growing sales. It appears the stronger growth in EPS is most likely due to Deere & Co’s strong share buyback program which we will address in the next section.
Generally I like to see a decreasing trend or at least a consistent balance in the number of outstanding shares of the company. John Deere has decreased outstanding shares over the past decade by about 21%. Along with dividends, Deere & Co. has been increasing shareholder value through stock repurchases.
Just last week, Deere announced the expansion of their current share buyback program by $8 billion. This means that they plan on buying back and retiring $8 billion plus $1 billion still to be bought under their original share buyback program. This buyback will occur in the future years at management’s discretion.
With less shares outstanding, the value of each share still available increases. When a company decreases the number of shares available it means the shares I own will have rights to a greater portion of the companies profits. I like seeing that management has shown a commitment of purchasing back shares and increasing current owners percentage of the company. Along with dividends, a decreasing share count is a way for management to return value to shareholders.
Current ratio measures a companies ability to meet short term obligations. Deere has a 2012 FYE current ratio of 1.72. This means that current assets will be able to cover almost double current liability obligations. I generally want to see this number be above 1. I don’t believe Deere should have any trouble covering short term obligations.
Net Profit to Long Term Debt
This number tells me how many years worth of profits it will take to pay off the current long term debt of the company. I like looking at this metric because it gives me an idea of whether the company has taken on too much debt or not.
Generally I look for this number to be less then 5 meaning if the company used all their earnings over the next 5 years they could wipe out all debt.
For Deere & Co, this net profit to long term debt ratio stands at about 1.78 for 2012. This means that Deere would be able to pay off all their long term debt with a little less than two years worth of net income. In my opinion Deere has a strong balance sheet and is a very safe company with not too much debt.
Dividend Payout Ratio
The dividend payout ratio measures the dividend per share compared to the earnings per share. How much of a companies earnings per share are they paying out to shareholders in the form of a dividend.
The past few years DE has maintained a dividend payout ratio around 25%. This tells me that Deere is paying out around a quarter of their profits back to shareholders and using the other half to continue to grow the company and buy back shares which they have had success doing over the past decade. I like the lower payout ratio because it tells me that the company has room to expand the current dividend rate and should be able to pay dividends in the future with little trouble even if economic conditions turn negative.
The P/E ratio is a metric I look at to determine if a companies current stock price is too high or within reason. With the most recent closing market price of $85.32 and most recent EPS of $7.64, DE has a current P/E right around 11.17. Typically the market P/E average is right around 14 so compared to the market in whole I might determine DE to be undervalued.
Looking at DE’s past P/E ratios, the average P/E ratio for Deere’s stock over the past decade was 13.48. The current P/E of 11.17 is slightly lower than the past average P/E ratios. This might lead me to believe DE is slightly undervalued. Deere is in the agriculture industry which is very cyclical. Deere’s performance will be sensitive to agriculture performance. This cyclical nature warrants a lower P/E compared to the market due to expected volatility in overall company performance.
Deere had EPS of $7.64 in 2012. The past earnings per share growth rate has been roughly around 27.5%. However, we calculated a much lower growth rate in sales revenues for Deere & Co. Therefore I am going to use an EPS growth rate of 10% over the next 11 years to figure out what 2023 EPS might look like. This gives me an estimated EPS of $21.80 for DE in 2023.
If DE is trading at reasonable P/E ratio compared to their history of 13 in 2023 then it will have a market price of $283.40/share (21.80*13). This will give me an estimated annual growth rate for Deere of 12.75% over the next 10 years. If you would be happy earning a 12.75% return over the next few years along with collecting annually increasing dividend payments, then Deere might be an investment worth considering.
This is a very rough exercise based on growth estimates that may not come to reality. Actual returns in DE will vary depending on how well the company increases their earnings and how the market values Deere & Co in the future.
Deere & Co. was a phenomenal investment for those who purchased shares 10 and 20 years ago. Based on the above analysis, while I don’t believe DE will perform as well as it did in the past, I do believe Deere could turn out to be an above average investment for dividend growth investors over the next decade. Due to Deere’s consistent growth and decade long history of dividend payments, I feel paying current stock prices for shares of Deere will turn out to be a solid investment.
The company is one of the largest farm equipment manufacturers in the world. They have very strong brand recognition. With world populations increasing, there will continue to be a higher demand for food production equipment. Deere’s tractors and other farm equipment will remain popular as farmers continue to work the land to produce food for consumption.
The one concern I have about owning DE is the cyclical nature of the company due to operating in the economically fickle agriculture industry. However, I have no doubt that over the long term, agriculture will continue to be in strong demand and therefore DE will reap the benefits of a growing industry. Personally, I look at the cyclical nature of the company as a benefit that could offer good long term buying opportunities of the company. I have little doubt that Deere will be worth well more in 30 to 40 years than it currently is.
Personally I own a few shares of Deere and would be interested in picking up more shares at current price levels.
Do you have an opinion on Deere & Co? Please share your thoughts in the comments below!
Disclosure: I own shares of DE.
If you are interested in learning more about the process of analyzing dividend growth companies, then be sure to sign up for more information on my new project Dividend Growth Academy. I am currently working on creating the Academy to help teach others interested in dividend growth investing.
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