In the learning to fish series, investors are provided with suggested guidelines for choosing a potential candidate and one candidate is selected as our play of choice. We provide reasons for this choice and in doing so hope to impart some understanding to those who are new to the field of dividend investing. The suggested guidelines can be accessed here "Our suggested guidelines when searching for new investment ideas." These are not absolute rules; they are just suggestions and there are always exceptions to the rule. The goal is to try to satisfy as many of them as possible Deere & Co (DE) is an example of play that fulfills all the suggested requirements.
Reasons to be bullish on Deere & Co :
- Net income has increased from $874 million in 2009 to $2.8 billion in 2011
- A good 5 year dividend growth rate of 13.3%
- Cash flow per share increased from $5.6 in 2009 to $8.98 in 2011
- Sales increased from $23.1 billion in 2009 to $32.01 billion in 2011
- Annual EPS before NRI increased from $4.01 in 2007 to $6.63 in 2011
- A good current and quick ratio of 2.03 and 1.8 respectively
- A quarterly revenue growth rate of 12.2%
- A quarterly earnings growth rate of 16.8%
- A good institutional presence; percentage held by institutions is 65%
- A low payout ratio of 23%
- A great retention rate of 77%
- A 3-5 year estimated EPS growth rate of 12.06%
- A five year ROE average of 28.4%
- Year over year projected growth rates of 24% for 2012
- A free cash flow yield of 3.4%
- A good interest coverage ratio of 6.4
- A five year sales growth rate of 7%
- $100K invested for 10 years would have grown to $371K. If the dividends were reinvested the rate of return would be much higher
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Suggested strategy
Consider waiting for a re test of its recent lows in the 70-71 ranges. Divide your money into two lots and deploy one if it trades in the above ranges. Put the other lot aside in case it trades down to the 63-66 ranges. One other option is to sell puts at strikes you would not mind owning the stock at. For example, you could wait for a test of the 70-71 ranges and then sell puts with strikes at 70. If the shares are assigned to your account, you will get in at a much better price as you will be able to deduce the premium you received from the strike price you sold the puts at. If the shares are not assigned to your account, you get to keep the premium and repeat the strategy again.
Company: Deere & Co
Growth
- Net Income ($mil) 12/2011 = 2800
- Net Income ($mil) 12/2010 = 1865
- Net Income ($mil) 12/2009 = 874
- EBITDA ($mil) 12/2011 = 5897
- EBITDA ($mil) 12/2010 = 4779
- EBITDA ($mil) 12/2009 = 3544
- Cash Flow ($/share) 12/2011 = 8.98
- Cash Flow ($/share) 12/2010 = 6.93
- Cash Flow ($/share) 12/2009 = 5.6
- Sales ($mil) 12/2011 = 32013
- Sales ($mil) 12/2010 = 26005
- Sales ($mil) 12/2009 = 23112
- Annual EPS before NRI 12/2007 = 4.01
- Annual EPS before NRI 12/2008 = 4.7
- Annual EPS before NRI 12/2009 = 2.84
- Annual EPS before NRI 12/2010 = 4.65
- Annual EPS before NRI 12/2011 = 6.63
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Dividend history
- Dividend Yield = 2.5
- Dividend Yield 5 Year Average = 1.97
- Dividend 5 year Growth = 13.3
Dividend sustainability
- Payout Ratio = 0.23
- Payout Ratio 5 Year Average = 0.28
Performance
- Next 3-5 Year Estimate EPS Growth rate = 12.06
- 5 Year History EPS Growth = 9.62
- ROE 5 Year Average 28.45
- Current Ratio = 2.03
- Current Ratio 5 Year Average = 1.97
- Quick Ratio = 1.8
- Cash Ratio = 1.54
- Interest Coverage Quarterly = 6.4
Conclusion
In general, a great way to get into a stock at a price of your choosing is to sell puts at strikes you would not mind owning the stock at.
Disclaimer: This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is imperative that you do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. EPS and Price Vs industry charts obtained from zacks.com. A major portion of the historical data used in this article was obtained from zacks.com. earnings and growth estimates sourced from dailyfinace.com
