Deere & Co (DE)

[TomK]

I would love to hear opinions from the folks here about DE as a dividend growth candidate. I've always stayed away from companies like CAT and DE, I think mostly because my impression is that they are heavily cyclical and as such, would have a tough time being consistent in the dividend payment, and growth, over the long haul. A quick look at DE's dividend history bears this out a bit, but in recent years they have gotten it together and have been growing the dividend nicely. It came to my attention in the FAST Graphs article posted today, suggesting that DE is somewhat undervalued at these prices, which always gets me excited.

So does DE deserve a spot in a conservative DG portfolio, or am I going to lose sleep over it?

[hendi_alex]

They both are so highly cyclical. IMO these are excellent sector rotation plays where the investor should show Buffet like patience while waiting to the right price and right climate to make a purchase. There is also quite a bit of talk about a farm land bubble that has been forming. I'm thinking that such will not end very pretty, and that DE will get hit pretty hard when and if an unraveling of farm land prices takes place.

I like this sector rotation chart as a general timing guide for entry or accumulation. Probably should look at it much more often!

[Kerim]

I hadn't looked at DE closely before, for some of the same reasons that you cited, Tom. But I saw some positive articles on it recently, and then your post, so I decided to run it through its paces. I have to say, it scores pretty solidly. In my system, it scores a 72, which puts it right in the same neighborhood as stocks like COP and WFC.

I'm not really sure I have a strong grasp of how "cyclical" stocks like this work, but when I look at its medium and long-term charts, it certainly looks a bit more volatile than the S&P or, say, KO.

DE has a solid 10-year streak of dividend raises going, which seems almost surely to be 11 soon. Earnings have been growing very solidly in recent years. Earnings took a beating in the 2009 recession, but since have grown in pretty linear fashion from $2.06 to an estimated $8.82 in 2013. (Note, however, that earnings were over $4.00 prior to the recession, so I've picked a favorable starting point for comparison.) At today's price of about $84.50, you get a P/E ratio in the 9 to 10 range, which is darned reasonable, in my book, even for a "cyclical."

Dividends have grown steadily also, with a five-year dividend growth rate of 13.6 percent, by my math. DE will have paid out $2.04 per share by the time 2013 is done. That puts DE's payout ratio around 23 percent -- tons of headroom for continued raises, even if earnings do not continue to grow at the same rate as recent years.

The only obvious weak link is the initial yield, which is an unexciting 2.4 percent at today's prices. It is not that bad, but you can do better elsewhere. If it were combined with big dividend growth, I might feel better, but even growing at 10 percent a year, your yield on cost in 2023 will still be under 6.5 percent. The payout ratio suggests they could raise the divvy faster, but -- just guessing here -- a "cyclical" stock might want to hold a little back for the slower years, so I wouldn't count on an accelerating dividend growth rate.

At any rate, DE scores well as a dividend growth stock the way I look at them. I doubt I'll pull the trigger any time soon, but I will certainly be adding it to my "watch closely" list and will start reading more about it to get a better feel for the company and its prospects going forward.

[EricL]

I'm long DE since March of this year. I bought it for many of the reasons you pointed out. The company has a great track record and seems to be pretty shareholder friendly. You are right about the initial yield being a bit low, but I like the history of increases and think the stock is a good value play here.

[hendi_alex]

Patience grasshopper, patience!

[TomK]

Thanks for the thoughts, guys. I'm pretty tempted to initiate a small position in this one. Will keep you posted.

[TomK]

Nice pop today on announcement of continuing / increasing the share buyback program.