We understand the importance of yield for the income investor. That's why our dividend methodology focuses not only on the safety of a firm's dividend but also on its future growth prospects. That said, let's evaluate the dividend of Deere (DE) (our full dividend analysis report on Deere and many others can be found here).
First of all, Deere's dividend yield is solid at about 2.2%, so we view the name as a nice candidate for the income investor. We think the safety of its dividend is GOOD. We measure the safety of the dividend in a unique but very straightforward fashion. As many know, earnings can fluctuate in any given year, so using the payout ratio in any given year has some limitations. Plus, companies can often encounter unforeseen charges (read hiccups in operations), which makes earnings an even less-than-predictable measure of the safety of the dividend in any given year. We know that companies won't cut the dividend just because earnings have declined or they had a restructuring charge that put them in the red for the quarter (year).
Therefore, we think that assessing the cash flows of a business allows us to determine whether it has the capacity to continue paying these cash outlays well into the future.
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As such, we've developed the forward-looking Valuentum Dividend Cushion. The measure is a ratio that sums the existing cash a company has on hand plus its expected future free cash flows over the next five years and divides that sum by future expected dividends over the same time period.
Basically, if the score is above 1, the company has the capacity to pay out its expected future dividends. As income investors, however, we'd like to see a score much larger than 1 for a couple reasons: 1) the higher the ratio, the more "cushion" the company has against unexpected earnings shortfalls, and 2) the higher the ratio, the greater capacity a dividend-payer has in boosting the dividend in the future. In fact, our dividend cushion caught every dividend cut for every non-financial, operating firm in our database (with the exception of Marriot, which interestlngly, has raised its dividend above the rate when it originally cut it).
For Deere, this score is 2.1, offering both a nice "cushion" and revealing excess capacity for future dividend growth. The beauty of the Dividend Cushion is that it can be compared apples-to-apples across companies. We make the scores for every firm in our coverage universe available on our website.
Now on to growth. As we mentioned above, we think the larger the "cushion" the larger capacity it has to raise the dividend. However, such dividend growth analysis is not complete until after considering management's willingness to increase the dividend. As such, we evaluate the company's historical dividend track record. If there have been no dividend cuts in 10 years and the company has a nice growth rate, its future potential dividend growth is EXCELLENT, which is the case for Deere.
All things considered, we're fans of the growth potential and safety of Deere's dividend, but the yield is a bit low for us to add the name to the portfolio in our Dividend Growth Newsletter.