Deere & Company: 7.7% Return On Investment

Jul.15.14 | About: Deere & (DE)

Summary

Deere has spent nearly $6 billion on stock buybacks in the last 14 quarters.

In addition to cutting back the outstanding shares, the company has avoided paying dividends of over $244 million over that time.

I will discuss how good (or bad) the return on investment has been for the buybacks.

Introduction

In the following article, I will discuss the share buyback strategy of Deere & Company (NYSE:DE) over the last 14 quarters.

Rather than repeat the introduction of my previous article in which I discuss General Electric, I invite the reader to read the intro to that last article for the reasoning behind why the buyback ROI is important. Also, here is a link to another article that details the math behind the calculations in more detail than I give below.

Deere's Recent Buybacks

Deere has been active in buybacks over the last 14 quarters - reducing the number of outstanding shares by over 10%. Here is a graph of the outstanding shares that shows how the company ramped up its buybacks at the end of 2010:

DE Shares Outstanding Chart

DE Shares Outstanding data by YCharts

DE spent about $5.88 billion over the last 14 quarters on stock, and the value of those shares as of Q2 2014 was about $6.32 billion. That equates to a total gain of about 7.5%, but does not tell us the annualized gain of either the shares themselves nor the $244.8 million in dividend payouts saved during that time. To get a figure that is meaningful, we need to do the slightly painful calculation of the Buyback ROI.

Looking at the last 14 quarters reveals the following history:

Time Period Shares Bought Avg. Price of Purchase
Q1 2011 3,624,000 83.37
Q2 2011 3,231,000 92.55
Q3 2011 5,950,000 82.70
Q4 2011 7,995,000 71.76
Q1 2012 4,969,000 78.07
Q2 2012 4,385,000 81.73
Q3 2012 6,304,000 75.97
Q4 2012 4,609,000 78.62
Q1 2013 1,116,000 86.35
Q2 2013 2,198,000 87.19
Q3 2013 5,487,000 84.54
Q4 2013 9,364,000 83.25
Q1 2014 5,482,000 87.07
Q2 2014 6,986,000 88.19
Click to enlarge

(Source: DE 10-Q and 10-K filings)

The following steps are taken to determine the Buyback ROI:

  1. For each quarter, multiply the shares bought by the avg. price = amount spent.
  2. Multiply the cumulative shares bought by the dividend paid that quarter=dividend payout saved.
  3. Add the dividend payout saved to the amount spent=cash inflow (or outflow) for the quarter.
  4. Repeat steps 1-3 for the 14-quarter analysis.
  5. For the last quarter, multiply the cumulative shares purchased by the final quarter share price, and add that number into the cash inflow (or outflow) for the quarter. This is the final value of all the shares the company purchased.
  6. Finally, all of the 14 calculated cash inflows (or outflows) are run through an internal rate of return calculation to produce the Buyback ROI figure.

For DE, in the last 14 quarters, the Buyback ROI was a decent 7.7%.

By comparing the Buyback ROI to the "Buyback Strategy" and to the "Buyback Effectiveness," we can how well the company picked the exact timing of the buybacks it made. The article that I linked above uses those two terms to mean the following:

  • Buyback Strategy: The CAGR of the total return of the stock during the time of the analysis. This can be thought of as the "baseline" ROI number that the buyback would have achieved if the stock had no peaks or valleys. In other words, if the stock simply moved in a straight line, this would be identical to the Buyback ROI.
  • Buyback Effectiveness: A comparison of the actual Buyback ROI to the Buyback Strategy: (1 + Buyback ROI) / (1 + Buyback Strategy) - 1. If a company has a positive Buyback Effectiveness, then it did a good job buying on the dips and avoiding the peaks. Think of this number as a scorecard measuring the short-term trading ability of the company.

Our final figures are as follows:

Buyback ROI: 7.7%

Buyback Strategy: 3.9%

Buyback Effectiveness: 3.6%

Conclusion

There are many other factors of buybacks to consider whenever evaluating any company. Does the company use a lot of stock options to pay employees? Are the buybacks used as a desperate measure to bump up EPS for a business that has slow growth? The list of pros and cons for buybacks is long and eminently debatable. Those are important, but are beyond the scope of this article.

The main priority of a company buyback should be to get a return on investment that is better than other options for the funds. Buying back stock when it is undervalued is an excellent use of cash (or even low-cost debt, up to a point). Deere perhaps earns a grade of "C" on its buybacks over the last 14 quarters.

Deere has nearly $8 billion of stock remaining to be purchased under the current repurchase plan, so we are sure to see a high level of buybacks going forward. As a (recent) shareholder, I do believe the shares to be undervalued (see my article about valuation) and I think within 1-2 years we will see that the Buyback ROI will be higher than 7.7%.

Disclosure: The author is long DE. 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.