Recent Buy: Deere & Company

Sep. 4.14 | About: Deere & (DE)

Summary

Dividend contender DE has outperformed the S&P 500 over the past 10 years by a healthy margin.

DE has some great statistics, including a TTM P/E ratio of 9.31 and a PEG ratio of 1.16. The 5-yr CAGR is 13.43%.

My fair value estimate of DE is $95.50, so this purchase resulted in a discount to fair value of 9.71%.

At a purchase price of $86.23 per share, yield on cost is 2.78%.

Editor's note: Originally published on Aug 8, 2014

Aug 8, 2014: Bought 30 shares of DE at $86.23 per share.

Founded in 1837, Deere & Company (NYSE:DE) is engaged in the production and distribution of agricultural and forestry equipment, construction equipment and engines, worldwide. A credit subsidiary, John Deere Capital Corporation, is one of the largest equipment finance companies in the United States with more than 2.4 million accounts.

DE is a Dividend Contender with a streak of 11 years of dividend increases. It pays quarterly dividends in February, May, August and November. The current dividend is 60¢ per share, so starting yield on cost is 2.78%. DE's 5-year dividend growth rate is 13.43%.

The stock has outperformed the S&P over the past 10 years by a healthy margin, as is evident in the graph below. It suffered from very heavy selling when the markets tumbled in 2008. The 5-year Beta of DE averages 1.26.

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Analysis of DE

My fair value estimate of DE is $95.50, so this buy resulted in a discount to fair value of 9.71%. The following table provides some key statistics, with highlighted values relating directly to my selection criteria.

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DE meets the requirements of the Chowder Dividend Rule, which requires that the sum of a stock's dividend yield and its 5-year dividend growth rate exceed 12%. For DE, the sum is 16.25%.

The only criterion that DE does not meet is having a Debt/Equity ratio of less than 0.50. For DE, the ratio is rater high at 3.40.

Based on these statistics, DE earns 6 out of a possible 7 stars: (******-)

The following chart shows DE dividend payments and earnings per share over the last 7 years. DE has grown its dividend steadily and the EPS growth similarly is trending up, even though earnings were unimpressive in 2010 and 2011:

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Other ratings for DE

Zacks Rank 3-Hold
S&P Capital IQ's Stock Report (**---) Sell
Thomson Reuters StockReport+ (8/10) Positive
MorningStar Rating (***--)
The Motley Fool's CAPS Rating (*****)
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Concluding Remarks

DE is the top candidate in the Industrials sector on my August dashboard of dividend growth candidates. It is my 4th Industrials sector holding and the 34rd holding overall.

DE's long term future looks bright given the rising global population and the need for increased yields and farm productivity. In the near term, though, farmer sentiments towards capital purchases could limit DE's earnings. In February this year, the U.S. Congress passed a new bill that replaces direct subsidy payments with an insurance-based system, providing farmers with a safety net only if prices fall too far. The impact of this change could lead to a reduction of equipment purchases in the near term.

DE expects worldwide sales of construction and forestry equipment to increase by about 10% in 2014. Furthermore, DE is increasing its manufacturing footprint overseas in markets like Brazil and India. Especially in Brazil, the construction equipment market is expanding rapidly as the country continues to grow as an exporter of agricultural commodities.

DE has an impressive record of share repurchases. Over the last decade, the number of outstanding shares has declined by 127 million. Last December, DE announced an expansion of the current repurchase program by $8B. With its dividend growth rate of 16% over the last 5 years, I think DE is an excellent addition to DivGro.

30 shares of DE adds $72 of expected dividend income, increasing DivGro's projected annual dividend income to $4,651.06.

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. The author has no business relationship with any company whose stock is mentioned in this article.