Deere Chooses Not To Raise The Dividend; What's Next?

| About: Deere & (DE)

Incorporated in 1868, Deere & Co. (NYSE:DE), a leading manufacturer of agricultural machinery, is one of the oldest corporations in the U.S. On February 26, Deere & Co. declared a dividend of $0.51/share. This would not be noteworthy except for the fact that it was the fifth straight dividend in this amount. This marked the first time Deere had failed to raise its dividend for more than four quarters since 2009, and the second time since 2003. Should investors be concerned?

Deere has stated in investor presentations that it intends to;

"consistently and moderately raise dividend targeting a 25% - 35% payout ratio of mid-cycle earnings"

(Source: Deere & Company February/March Presentation)

Do the numbers bear that out?

DE Income from continuing ops and dividends per share, 2004 - 2013

FY ended

EPS

Div. declared

Payout ratio

2013

9.09

1.990

22%

2012

7.63

1.790

23%

2011

6.63

1.520

23%

2010

4.35

1.160

27%

2009*

2.91

1.120

38%

2008*

4.77

1.060

22%

2007

4.00

0.910

23%

2006*

3.17

0.780

25%

2005

2.94

0.605

21%

2004

2.78

0.530

19%

* = adjusted

Source: Item 6 from DE 10-K's; author's calculations

Click to enlarge

Deere has certainly 'consistently and moderately' raised the dividend, but the payout ratios look a little low next to the stated target. Deere's payout ratio has only eclipsed 27% once in the past ten years, and that was in 2009, at the bottom of the business cycle. Deere's preferred method for returning excess cash to shareholders has been share repurchases:

Deere's guidance is for a net income of $3.3B for FY 2014, which would translate to an EPS of $8.80, assuming 375M shares outstanding. Per Reuters, analyst estimates for FY 2015 EPS range from $6.11 to $9.08, with an average of $7.64. I don't put too much stock in analyst estimates going out more than 6 months or so, but 2013 is clearly expected to mark a cyclical top, and I think the dividend non-increase probably signals that Deere's management feels the same way.

Fixing the annual dividend at its current level of $2.04, a payout ratio of 30% implies mid-cycle earnings of $6.80. Since actual payout ratios have been well under 30%, I think this is a fairly conservative number. At $85/share, an EPS of $6.80 translates to a multiple of 12.5x, which I find to be an attractive valuation for a company of this caliber, especially in the current environment of high stock prices and low interest rates.

However, income or dividend growth investors may wish to look elsewhere. The stock currently yields just 2.4%, and with earnings expected to diminish over the next 18 - 24 months and payout ratios close to historical norms, significant dividend growth seems unlikely in the near term.

Disclosure: I am long DE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.