Deere & Company's (NYSE:DE) stock had a bad start to the year as it lost around 5% of its value in the first two months. However, after the early year fall, the stock has been rising and currently it trades for a year-to-date loss of only 1.47%. The stock has steady growth and the long-term trend in the price has been upward - over the last twelve months, the stock has gained about 12% and about 127% during the last five years. Investors should not be worried about the short-term trend in the stock price and focus on the long-term potential. The stock currently has a dividend yield of 2.6% with an annual dividend of $2.4 per share. In this article we will briefly look into the company's current business situation. Our primary goal, however, would be its dividend growth and dividend paying capability.
Strong Dividend History
If an investor has to evaluate the dividend of a company, it is important to look into its dividend history. The trend and the growth in dividends show the commitment of the company towards paying cash to its shareholders. Usually, businesses want to maintain a steady and manageable growth in dividends and avoid cutting or reducing dividend growth rates as it sends a negative signal to the market and might impact the stock price. The image below shows the quarterly dividend declared by the company.
The dividend history of the company looks quite strong and reflects sustainability. The company paid $1.99 in annual dividends per share during the last year. For the current year, the annual dividend will be $2.4, showing annual dividend growth rate of 20%. It is quite a large rate of growth in dividends and shows the company is confident about the future cash flows and expects to meet its obligations.
Free Cash Flows and Dividend Analysis
Deere & Company has paid $778 million in cash dividends over the last twelve months, and during the same period, the company had free cash flows of $1.18 billion. Based on free cash flows, the company's payout ratio comes out to be close to 66%. During the last year DE's cash dividends were $753 million and the company had free cash flows of $879 million, and its payout ratio was close to 86%. During the last twelve months, the payout ratio of the company has improved substantially. The current payout ratio of the company is more in line with the payout ratios of mature companies. At current levels, the company should be able to meet its dividends obligations.
Agricultural and Construction Equipment Business
Currently, the core business of the company is facing weak demand which the company expects would go 5-10% further down in Canadian and the U.S. markets. Demand in Europe is also likely to decrease by 5% for the remaining year. While in South America, the company expects the demand to fall 10%. Collectively, the company forecasts a 7% decline in revenues in the coming quarter. The decline in the U.S. is mainly caused by the rise in production of agricultural commodities. This caused the prices of these many commodities to fall and subsequently resulted in lesser income for farmers. This condition is likely to continue until the next crop cycle. As the farmers get their purchasing power back, the company's business will be back on track.
Impressive Margins Paint a Solid Fundamental Picture
With huge operations, the company has achieved economies of scale which allows it to reduce costs. As a result, its operating margin is spectacular as compared to the overall industry. The twelve-month-trailing operating margin of the company is 16.1% as compared to the industry average of 12.3%. Furthermore, the company's 3 year average net income growth is 23.8%, which outpaces the industry average growth rate of 17.5%. The three year average revenue growth for Deere & company stands at 13.3% while the industry average stands at 11.6%. The average revenue growth is impressive in the industry for a mature industry - operating margin and net income growth for the company are extremely impressive. The growth in revenues and margins shows that the company has a solid base and it should be able to weather this temporary slowdown in the sector.
We believe Deere & Company is a solid long-term investment due to its solid financial position and strong fundamentals. The company has cushion in its cash flows for future growth in cash dividends, which makes it an attractive investment for income investors. The slowdown in the sector is expected to be temporary and an increase in demand for the agricultural products should enhance the revenues of the company.
Additional Disclosure: This article is for educational purposes only and it should not be taken as an investment recommendation. Investing in stock markets involves a number of risks and readers/investors are encouraged to do their own due diligence and familiarize themselves with the risks involved.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.