Well, I promised you all that while I quit my full-time job to focus on writing, I didn’t quit my pursuit of financial independence. And to that end, I have remained committed to investing in high-quality companies that regularly and reliably pay and raise dividends. Of course, my capital is more constrained than before, but I’m doing my best.
This most recent equity purchase was really interesting for me. I’ve honestly had mixed feelings on this company in the past, but I could no longer ignore the low valuation, attractive entry yield, and strong dividend growth over the last decade.
Another interesting consideration is that this position was initiated just days after my initial investment with Visa Inc. (V). So it’ll be fun to see how a value play compares to a growth play over the next decade or so in terms of both business performance and stock performance. However, I feel that both offer an attractive valuation based on potential growth prospects, although the value and growth mix for these two companies are on different sides of the spectrum.
Another interesting fact is that my newest investment is another Warren Buffett holding through the Berkshire Hathaway Inc. (BRK.B) investment portfolio, just like Visa. I guess I’m creating my own mini Berkshire!
I purchased 15 shares of Deere & Company (DE) on 7/11/14 for $88.22 per share.
Overview
Deere & Company is the world’s largest farm equipment producer. They also have sizable business in construction machinery and lawn service equipment.
The company operate in three segments: Agriculture & Turf (77% of fiscal year 2013 revenue); Construction & Forestry (16%); and Financial Services (7%).
Fundamentals
Deere has had a great run over the last few years as the broader economy picked up and demand for their machinery grew. They set record after record for earnings as they rode this wave. However, future earnings growth for the next few years looks bleak as Deere operates in a highly cyclical industry.
I’m going to take a look at their operating performance over the last decade. Their fiscal year ends October 31.
Revenue has climbed from $19.986 billion in fiscal year 2004 to $37.795 billion in FY 2013. That’s a compound annual growth rate of 7.34%, which is pretty strong. Growth in revenue over the last few years has been especially impressive. Even though DE is a cyclical stock, the revenue growth was fairly secular other than the 2009-2010 period which happened to coincide with the Great Recession.
Earnings per share grew from $2.78 to $9.09 during this same time period, which is a CAGR of 14.07%. EPS has likewise grown rather steadily other than the two aforementioned years. DE’s financial performance over the last decade has been really strong.
However, S&P Capital IQ predicts EPS to grow at a compounded rate of 2% annually over the next three years. This is generally in line with company guidance. Deere is forecasting a 4% decline in equipment sales for FY 2014, and sales in the Agriculture & Turf segment (Deere’s largest) fell 12% for the second quarter of FY ’14. Furthermore, they’re guiding for just $3.3 billion in net income for FY 2014, compared to $3.537 billion for FY 2013. So we’ll likely see lower earnings for the next couple of years before perhaps seeing a rise again in FY 2016.
Dividend growth has been pretty fantastic over the last decade. The company has raised its quarterly per share dividend for 11 consecutive years, with a 10-year dividend growth rate of 16.3%. This kind of aggressive growth is really attractive to me, and the most recent dividend raise of 17.6% back in May provided me the confidence to go ahead and start really taking a good look at this company. And I expect dividend growth to continue even with the strong possibility of falling earnings for the next couple years, as the payout ratio stands at just 26.3%. So earnings could halve and the dividend would still be covered perfectly fine. And the yield, at 2.72%, is pretty attractive in this market.
And the dividend growth should also continue to benefit from aggressive share buybacks. The company has reduced the share count from 506.2 million in 2004 to 389.2 million at the end of FY 2013. Furthermore, the company authorized an $8 billion buyback program last year, which should counteract some of the effects of falling demand in their products during the next cycle.
The balance sheet is solid, though it looks worse than it really is. The long-term debt/equity ratio is 2.1, which appears high. However, as noted above Deere has a large finance operation in order to provide flexible purchasing options to customers, and maintains a large receivables account. The interest coverage ratio is 8.4, so the company can comfortably cover interest expenses. Furthermore, Deere’s long-term debt has an A rating from Standard & Poors.
Profitability metrics look pretty sound. Net margin has averaged 7.51% over the last five years. Return on equity has averaged 35.61% over the same time frame. These numbers look solid, and compare really well with competitors like Caterpillar Inc. (CAT).
Qualitative Aspects
I like the long-term story here. As I mentioned at the outset, I’ve been mixed on investing in a company like Deere because I prefer investing in companies with better earnings visibility and more secular growth patterns. DE, meanwhile, is a cyclical stock. As such you typically will see peaks and troughs with earnings, but DE has done really well with this over the last decade. I’ve been lukewarm on DE because earnings are expected to fall due to softened demand for their products, and I expect either the share price to fall with earnings or the price-to-earnings ratio to expand.
However, I realized I was thinking like a trader here and not a long-term investor. If I’m investing in DE for the next 20 or 30 years, what does this matter? Will falling earnings in FY ’14 and FY ’15 really matter in 2050? Probably not.
And speaking of 2050, Deere cites predictions of a global population to rise from the current ~7 billion to an estimated 9 billion by that year. And 70% of these people are expected to live in cities. As more people live in cities this reduces the available pool of people to work the fields and grow the food necessary for the rest of the world. As such, Deere predicts increased demand for their farm equipment as farming becomes more mechanized and automated.
And it’s not just more people that will be populating the planet in the future, but as emerging markets grow and middle classes burgeon, these additional people are expected to enjoy higher living standards as the quality of life rises across the world. As such, it’s expected that the demand for grain-intensive food like beef will rise. In addition, the demand for all food, fuel, infrastructure, and shelter will also increase. This further increases the demand for the products that Deere provides in these areas.
And growth overseas could provide huge opportunities for Deere. They’ve long been a recognized company in the heartland of America with their green tractors, and enjoys an approximate 50% market share here. However, the company generated 36% of its equipment sales outside the US for 2013. And the company is aggressively expanding outside the US as they opened new dealerships in China and and Brazil last year along with distribution centers for parts in South Africa and Argentina.
Deere provides a brand name product that should continue to remain in demand as long as the world continues to need the resources and infrastructure their machinery helps provide. Their dealer network, support facilities, and retail-financing solutions that are now offered in more than 40 countries provide a backbone for a healthy company.
Risks
This company, like any other, is not without risks. The business is highly cyclical and they operate in a very competitive industry. In addition, Deere’s customers are exposed to commodities that fluctuate wildly in price, like corn and soybeans. And the price of some of these commodities have been falling as of late, further putting pressure on Deere.
Valuation
Deere shares look particularly cheap here, with a P/E ratio of just 9.69. However, cyclical companies can look most cheap at the top of a cycle when earnings have peaked and future earnings are predicted to fall. That lowers demand for shares and contracts the multiple. Likewise, a higher P/E ratio can be seen when earnings are lowest at the bottom of the cycle and investor sentiment is highest. This increases demand for shares and expands the multiple.
But this valuation is pretty attractive when considered against the long-term prospects of this company. Even significantly lower earnings and an expanding P/E ratio means the downside is somewhat limited here. The five-year average P/E ratio on DE shares is 15.7, so you can see there is a lot of room for slowing growth here. I consider myself as an investor who manages risk and downside foremost, and I concentrate on that far more than I look for growth. Which is why I typically try to target stocks with margins of safety on low valuations. As such, I think this low of a valuation limits my risk. Basically, if DE were not a cyclical stock this would just be a blockbuster investment, especially considering where the broader market is at. But as a long-term investor who expects to hold through many business cycles, I think investors should do well if buying at today’s price.
I valued shares using a dividend discount model analysis with a 10% discount rate and a 7.5% long-term growth rate. This growth rate appears fair to me, as it’s well below what DE has posted over the last decade in terms of growth in profitability and dividends. This gives me a fair value on shares of $103.20, so I think there’s a margin of safety here.
Conclusion
An increasing global population is a tailwind for many companies, but especially so for those involved in agriculture as more people puts strains on food supplies. That means efficiency must be improved, and as more people live in cities the demand for mechanized and automated farming should rise which bodes well for Deere.
This purchase adds $36.00 to my annual dividend income based on the current quarterly payout of $0.60 per share.
My portfolio now holds 49 positions, as this was a new investment for me. My rate of initiating new positions is going to now slow pretty dramatically as I’m nearing my target of 50 positions across the portfolio. I’m likely going to go a bit over this number as there are still a number of companies I’d like to own a chunk of, but I don’t want to manage much more than 50 companies. As such, I’ll be looking to reinvest back into current positions with the majority of new capital for the foreseeable future. Pruning positions that aren’t performing well is also an option, though I typically sell very rarely.
I’m going to include current analyst valuation opinions below, as I use these to concentrate my reasonable valuation estimate:
Morningstar rates DE as a 3/5 star value, with a fair value estimate of $95.00.
S&P Capital IQ rates DE as a 2/5 star Sell, with a fair value calculation of $110.00.
I’ll update my Freedom Fund in early August to reflect this recent purchase.
Full Disclosure: Long V, DE.
What do you think? A shareholder in Deere? Think this was a wise purchase?
Thanks for reading.
Photo Credit: Stuart Miles/FreeDigitalPhotos.net
Hah! I bought shares of DE the same day you did! I have to say I like your analysis, and it is hard to fall in love with companies with high debt levels, but in today’s market it is hard to pass up on a company with such a low P/E ratio.
DM,
Thank you for sharing the information. I am not too comfortable to owning the DE stocks right now. May be I need to learn more about their products and services. Does the company have repeat customers? How often people buy their products (like gas, food, drink, etc)? Or they have just an one-time buyer? Despite the facts, the company valuation is very attractive, and had a really good track of records.
You are getting very close to your target number of positions (50). Will you stick with the target number of or just keep adding new position?
Nice buy on Deere Jason. I’ve heard you talk about the company a few times. Certainly an iconic brand and an industry leader. You also mentioned Visa. I’d like to buy a few hundred shares of Visa myself, but I’m having a really hard time picking a purchase price. Glad you seem to be well. Take care
-Bryan
Nice buy, I am looking at DE also, I plan on buying some and hoping it drop down below $88.00 before I initiate a buy. The P/E is low right now and is a good time to buy. Hoping to add some to my portfolio.
Hey DM,
Long time reader, first time commenter! You’ve got one of the best, if not the best, blogs on dividend investing.
I’ve been following Deere for a while now and wondering whether (actually, more accurately, when) to initiate a position in it. I like that it’s committed to shareholders with share buybacks and increasing dividends. The one reason I haven’t bought it is that earnings look like they’re going to be declining or staying flat in the next couple of years. While this can increase the P/E ratio in the short term and make it look like the stock is becoming overvalued, I wonder if the market will respond to the “disappointing” cyclical earnings by decreasing the price over the next couple of years and actually making it an even more attractive purchase. I know in a sense what I’m doing is market timing, but I like the idea of squeezing a couple of more percentage points out of an already promising investment. Although, since I have a long investment timeframe (30+ years), I’m not sure that waiting around for one or two years will really have a big impact on my overall return like you said in your article. Plus I’d be missing out on the dividend payments in the meantime.
Nice purchase and a nice yield. Another positive factor is the number of outstanding shares has been going down over the fast few years which also increase shareholder value.
Once again, congrats on the purchase.
I think DE is a solid buy for you. I always keep an eye on it. However, I personally try to stay away from stocks that are tied to the agriculture industry, because I am actually a farmer, so I get plenty of exposure that way. If the ag economy tanks, I don’t need my stock portfolio to follow.
But DE itself is a great company. I’d say it is the JNJ of agriculture equipment makers. Hands down the best brand. Also it’s businesses in the construction and turf markets should help the next time the ag economy takes a down turn.
Now that you are an owner of the company, and since virtually all of my farm equipment is John Deere green, I guess you could say I am one of your customers now!
Nice to see you join as a fellow owner in DE.
We seem to have pretty much the same analysis on DE. It’s cyclicality and the finance arm kept me hesitant for a while.
As it’s a cyclical stock, I don’t expect it to rise among my top holdings. However, it stands at a whopping 1% of my portfolio and it may someday be 2-4%. I wouldn’t feel too uncomfortable with that.
Enjoy the summer!
Jarmo
$87.92 as I type and price seems to go lower…I wonder why DE didn’t increase dividend in March but instead in June? Now there’s five $0.51 dividends in the row and $0.60 from June ’14. It doesn’t of course matter but still.. 🙂
Hi DM,
Great buy, I have been scouting some companies and Deere caught my eye as well. I ended up going for a different company that I will describe a post soon, but I think you had a very good pick. I also didn’t know that Warren Buffet owned DE, that’s great to know.
Congratulations on your purchase, there goes another step towards the goal.
Best,
Dividend Venture
DM,
Deere is starting to look interesting here along with Boeing. I have been thinking about selling my Intel shares if they don’t raise the dividend in the next few weeks. Deere and Intel yield about the same, but I already own CSCO, IBM, and MSFT so I wouldn’t mind diversifying outside of technology and DE would be nice as GE is my only industrial company.
MDP
Strong. I really like how your portfolio is balanced. A bear market is almost guaranteed within the next few years, giving you the opportunity to double down on these 49 world class companies which you have a stake in.
Thanks for sharing your recent purchase of DE. I must say I was a little surprised at this purchase. I know you have spoken about DE in the past but I didn’t think it was a front runner for a July stock purchase. You make great points about the company, business and stock valuation which compels me to think about this one too. I guess there are still some nuggets of value in this high priced market.
DE reminds me of a choice I made a while back while building out my portfolio. The choice was DE or CAT. I chose CAT. Similarly, the choice I see many bloggers make with PG or UL. I chose PG. Not to take anything away from either of the stocks, I just didn’t want to build out my portfolio too fast and own too many companies at once.
I like the choice. I picked up 34 shares of DE a few weeks ago. Considering picking up some more tomorrow, since its getting roughed up today. Down a few dollars.
Hi Jason,
thanks for the information.
To make it short: the very lord P/E ratio combined with a rather aggressive dividend growth rate makes this company very interesting. But there is another point – I call it my gut feeling: even here in Germany one can see a lot of Deere machines in the fields. This tells its own story.
So my thumbs go up for this buy.
Best regards from Germany
rickrack
DE has been on my watch list as well, just need to pull the trigger. Definitely on it’s way to becoming a dividend champion. As always, great analysis Jason!
Thanks, Sam
Yes lol, Repeat customers, there’s whole generational farmer families who will only buy Deere equipment. You also didn’t mention their global expansion, or share repurchase plans. The company has alot going for it from a corporate standpoint as well. I’d say it’s a good purchase but I may be a little biased.
I too like CAT and they’ve preformed comparatively well, I don’t think you’ll go wrong unless CATs expansion into indonesia/Asia doesn’t start to get some real traction. (<–a punny)
Don’t forget about all the Sabo & Dortmund equipment in the EU too. Shrewd acquisitions that have panned out very well.
I’m surprised by your purchase but not by the segment, I’ve thought you were light in Industrial manufacturing for awhile. I think it will turn out well, I do agree with your assessment of risks based on the cyclic nature but I don’t think those should really be a factor for your goals and will probably help you long term if you continue to reinvest. Also because of the financial arm and other non agricultural based products (electronics, governmental etc etc) I think you’ll find this company a different animal than the world saw in the 80’s, as long as you’re ready to stick to your long term guns. I’d say your spot on and keep it up.
Kipp,
Nice buy! Great minds think alike. 🙂
The debt load actually isn’t bad at all. They keep a pretty large accounts receivable, and their loan portfolio has been improving off of already pretty solid levels.
Glad to have you on board as a shareholder!
Best regards.
Finance Journey,
I would definitely take a look at DE. I’m not saying it’s for all investors, but the valuation is pretty compelling, even factoring in the next cycle.
As I mentioned in the post, I’m going to slow new positions dramatically. So most of my new capital will go to bolstering existing positions, while also pruning the portfolio with the very occasional sale. I’m likely going to end up a little over 50, but I don’t want to land too far over that number for the long haul.
Thanks for stopping by.
Take care!
Bryan,
I like both of these companies. The interesting thing is that Visa and Deere are pretty much polar opposites both on the business and stock side. So it’ll be interesting to see what these investments look like five or ten years down the road.
Things are definitely humming along for me. I couldn’t be any happier. Hope all is well down there in FL! 🙂
Cheers.
J,
I hope it falls to an attractive level for you. I don’t think DE is going to go gangbusters from here, but you never know. I didn’t expect CAT to pop like it did, but that was a pretty good investment down in the mid $80s.
Take care!
Omar,
Thank you very much for the kind words. I truly appreciate it. I put a lot of work into this blog, so the support and encouragement is very much appreciated! 🙂
Your thoughts echo mine, and was one reason I hadn’t initiated a position in the company until now. But as I mentioned in the post, worrying about an expanding P/E ratio or a falling price over the next cycle is really missing the forest for the trees and perhaps focusing on the short term too much. I honestly don’t know what’s going to happen, and earnings may fall more or less than they’re expected to. But what’s more important is what will Deere look like 20 or 30 years from now? What does agriculture look like? How mechanized and automated is farming? Will Deere continue to produce top notch products and maintain their share in this market, while also expanding their share abroad? These are the thoughts that should be crossing our minds. Not what will happen to the P/E ratio or the stock price over the next year or two.
And, yes, in the meanwhile DE is paying a very healthy (and increasing) dividend.
I hope that helps!
Best wishes.
DGJ,
The buybacks have been very aggressive. And the $8 billion program that was authorized last year should be a huge tailwind for earnings over the next couple of years.
Thanks for stopping by!
Take care.
BCS,
I can’t blame you there. I don’t think I’d want to be exposed to ag through my portfolio if it’s already my way of life. That would be too many eggs in that basket.
Appreciate you as a customer, though, even if you won’t be a shareholder! 🙂
Best wishes.
Jarmo,
Thanks for stopping by!
I hear you. I had the same reservations. But I think the rewards outweigh the risks at this price, but we’ll see. I’m pretty optimistic, and the downside appears pretty limited.
I also don’t plan to make it a major holding, but I also wouldn’t mind quickly doubling or tripling it in the coming months if the stock stays at this price or below.
You enjoy your summer as well! The weather over here in Michigan is just beautiful right now.
Cheers!
Mr Bean,
I noticed that as well, but DE hasn’t had a regular schedule of dividend increases like a lot of other popular companies. And I notice this isn’t completely uncommon in the industrial space. I think UTX was raising their dividend every five quarters there for a while, if I’m not mistaken.
DE would sometimes raise their dividend after two quarters, sometimes after six, etc. As long as I’m earning more every year I’m okay! 🙂
Best regards.
DividendVenture,
Thanks so much. Another step toward the goal, indeed.
And this is also a Gates holding as well. Cascade is Deere’s top shareholder. 🙂
Looking forward to seeing your next investments!
Cheers.
MDP,
Sounds like a prudent move. I wish I would have waited to sell off INTC, but I’ve done well with the redeployed capital.
I like GE as well, though. And I’m thinking about increasing my stake here pretty soon.
Thanks for stopping by! Keep up the great work over there with the $100/week. 🙂
Best regards.
Josh,
I certainly hope we see a major pullback. I don’t have quite as much regular investment capital as I used to, so cheaper stocks will allow my now limited capital to go even further. Let’s keep our fingers crossed. 🙂
Take care!
DivHut,
Looks like you’ve done well with CAT. I passed on CAT back a while ago for a number of concerns that are similar to DE. But I remember CAT looked like DE not that long ago. Similar in price and many metrics. And that thing really took off. Not saying that will happen with DE anytime soon, and I hope not so I can continue to add here. 🙂
But I don’t think you’d have to choose between the two. DE has much more focus on ag, and CAT on construction. But there is certainly some overlap there.
I own PG, but would love to own UL at some point. PG is more focused on personal and home products, while UL has a lot more food exposure.
Cheers!
Rob,
Nice to join you as a shareholder!
Love days like this. I hope it stays like this for a little while. 🙂
Best wishes.
rickrack,
Thanks for the insight there from Germany. I LOVE to hear stories like that. Sounds like DE is doing well over there. 🙂
Appreciate you stopping by and sharing!
Best regards.
Sam,
I think it’s definitely on its way. The payout ratio is very low right now, so even a major hit to earnings allows them some cushion to continue raising the dividend. We’ll see how it goes!
Appreciate the support.
Take care!
anti1b,
I did mention both those things, actually. Did you read the post?
Buybacks:
“And the dividend growth should also continue to benefit from aggressive share buybacks. The company has reduced the share count from 506.2 million in 2004 to 389.2 million at the end of FY 2013. Furthermore, the company authorized an $8 billion buyback program last year, which should counteract some of the effects of falling demand in their products during the next cycle.”
Global expansion:
“And growth overseas could provide huge opportunities for Deere. They’ve long been a recognized company in the heartland of America with their green tractors, and enjoys an approximate 50% market share here. However, the company generated 36% of its equipment sales outside the US for 2013. And the company is aggressively expanding outside the US as they opened new dealerships in China and and Brazil last year along with distribution centers for parts in South Africa and Argentina.”
Cheers.
anti1b,
I’m happy with DE here. It may not pop anytime soon, and I would actually prefer it that way. The last thing I want is for this thing to run away from me before I’m done building up my position. I wouldn’t ind adding more to DE next month perhaps.
Best regards!
Deere is a good stock to own… This will do well over time as the population will increase and their products will be needed more and more and to be more efficient as well.
Congrats on adding DE – I bought back in December & added in June. While there’s nothing sacred about diversification among industries, I still think it’s good to add some industrials/manufacturing to the mix. The cyclical nature of the business and near-term low growth are already priced in & I expect this to be a good value over time. Almost to 50! Enjoy Michigan – I was just there last week visiting family (I grew up there too).
IP,
I’m with you. I hope we’re both right in that thesis and it does well over the long haul. 🙂
Thanks for stopping by! And thanks for the support over on your blog. Really appreciate it.
Best wishes.
Chris,
Glad to join you here. I think DE will serve us well for the long haul, especially at this price. I’m definitely interested to adding to it, perhaps as early as next month, depending on the price.
I’m definitely enjoying being back home. I went with my younger sister to a doctor appointment, as she continues to get seen weekly now as she nears her due date. Very exciting stuff, and I’m anxious to be an uncle. Of course, we’ll see how happy I am to be up here when January hits! 🙂
Have a great weekend.
Cheers.
DE looks like a good choice. I wanted to get into Caterpillar, but the opportunity was never truly there. DE products are ubiquitous, so that’s great. I’m glad to see you making purchases after leaving your job, I don’t think it will ever get old!
Keep on trucking!
Spoonman,
DE products are indeed ubiquitous, especially around here in rural Michigan. I was actually stuck behind this beast of a Deere tractor that was on the road for a bit earlier. I actually didn’t mind being stuck behind this farmer doing maybe 20 mph on a 55 mph road because he was driving a Deere! 🙂
Have a great weekend.
Best wishes.
DGI also started a position in Deere this week. I’ve been watching them for a while but always ended up picking something less cyclical. Like someone posted earlier, my only exposure to industrials right now is GE, and they’re a rather large position.
GE is supposed to be doing their SYF spinoff late this year, although reports on it are still pretty vague. So there’s your 50th position! Congrats!
Nice buy…with a P/E under 10, decent yield of 2.6%, and 10 years of consecutive dividend increase, I can see why DE seems to very popular among dividend growth investors these days. And with the 2.26% dip today, I think the it only yells “opportunity” for many of us who are looking for good value dividend growth stocks put our money in. 🙂
Cheers to continued growth and success! AFFJ
I like Deere and have been eyeing it since some time. Good buy!
Best wishes.
Justin,
I’m still not totally sure how they’re going to handle the other 80% of Synchrony. As I understand it, it’s going to be a share swap. And I’ll probably elect to just keep my GE shares intact. We’ll see what happens in 2015, though.
Cheers!
AFFJ,
I definitely think this is an opportunity, though for the long term. I don’t expect this thing to run away anytime soon with contracting earnings. But I think this company will do well over the next decade and beyond. And the opportunity just got better today. I’m hoping this continues for the rest of the month and into next month when my capital is replenished! 🙂
Thanks for stopping by. Hope you have a great weekend!
Best wishes.
PIM,
I think one can do worse than Deere here. I don’t see much of a catalyst on the immediate horizon, but that’s good news for a value investor trying to build a position. 🙂
Best regards!
Congratulations on your purchase, I when anilize CAT and DE, knowing I did not know which was better,, CAT, he did better in the mining, the other for the better in agriculture. In the end, I have both.
regards
Jason,
Since your portfolio is almost complete, this will probably be the only time I get to say I’m glad to see you become a fellow shareholder! I didn’t expect this at all for you based on past comments and it’s great that you’re now willing to put up with the cyclical nature of the company because you see the long term value. I purchased around the turn of the year and last month and I couldn’t agree more with your analysis. I love how the low payout ratio is ready for the short term difficulties and that we should still see solid dividend increases. Have a great weekend!
Hi DM,
nice buy, I have Deere in my dividend portfolio already since 2009, which was a great buy back then and gives me some real nice yield-at-cost today. I am pretty sure it is a perfect diversification holding for a long term investor, where so many of the nice investments are in the consumer goods industry (P&G, KO, MO, PEP, etc, etc).
DM, I sent you a message on facebook – in case you didn’t see it yet.
All the best
Jack Markus
Thanks for the update. Nothing runs like a Deere. Nothing dividends like a Deere.
Jason,
I didn’t have time to read all of the comments, so apologies in advance if you already answered my questions. First, why DE over CAT? I keep seeing posts about DE vaguely comparing them to CAT, but without any real explanation. Second, the average PE of 15.7 over the last 5 years came during an economic expansion, as least as far as DE is concerned. Have you looked at the average PE during a contraction as is predicted for the next few years?
Otherwise, another great write-up.
Best of luck,
KeithX
vimasari,
I think there’s definitely room for both. I missed CAT down in the low $80s, but you can’t win them all!
Best regards.
Ryan,
Haha, glad to join you!
Yeah, I was a bit lukewarm on Deere, but the valuation is just plain compelling. Even a drop in earnings over the next two fiscal years is really a drop in the bucket if you’re looking at this over the long haul.
Everything looks fantastic here except for the earnings forecast, and I’ll gladly ride the short-term volatility for long-term gains. 🙂
Best regards!
Jack,
I’ll log on Facebook here in a little while and respond. I didn’t get an email alerting me to a message, though. That’s weird.
Glad to join you as a shareholder here. I think DE will serve us well, and I feel the same about many of those other companies as well. But it’s definitely nice to have diversification across a wide swath of the economy.
Cheers!
Wade,
I certainly hope you’re right about those dividends! 🙂
Thanks for stopping by. Have a great weekend!
Best wishes.
KeithX,
I chose DE over CAT because the P/E ratio is about half right now, the yield is much higher, and the dividend growth over the last ten years has been much more impressive. But I think there’s room for both as they focus on different areas, with DE more concentrated on ag and CAT more concentrated on construction and mining. That being said, there’s some overlap, so I won’t mind if I own only DE from here on out.
I missed CAT down in the low $80s, and that’s fine. Can’t snag them all.
I don’t have access to their five-year average P/E ratio over a significant contraction in earnings because they just plain haven’t had such a thing in quite a while. Furthermore, their earnings aren’t expected to contract enough to cause the P/E ratio to rise all that significantly. The 2% growth rate over the next three years predicts some mild retraction over the next two fiscal years, then some upward momentum. We’ll see. They’ve been really strong over the last decade.
But I don’t mind some short-term volatility here in earnings. I’m looking at owning the business over the next decade and beyond. And I’d love to average down. 🙂
I hope that helps!
Best regards.
Jason, sorry if you’ve addressed this before, but is there a particular information source you use to do all of this fundamental analysis?
Thanks!
I think Deere is a very solid company and the price looks cheep. I don’t buy because the free cashflows in the last 3 years were negative. All the dividends and share buybacks are only possible because of debt. Here you must understand in witch cycle Deere is at the Moment. If Deere invest in bad times much less and is abel to pay all the debt back while paying rising dividends then there shoud be no problem. Because I have no clue about this I don’t invest. But as you mention in your text, Berkshire is invested in Deere and because I am a shareholder in Berkshire I also will profit indirectly if Deere make good profits.
Best regards
Jonas
I sold out my entire position in con Agra yesterday and bought DE within 2 cents of what you paid. I follow your blog and Tim Mcaleens very closely, and the fact that neither of you owned DE caused me some concern, even though the numbers seemed pretty clear it was a great buy in this market. So imagine my surprise to log on to your blog this morning and see you bought it as well. One farmer down the road from me has a fuel tank that he painted “Deere Food” on the side of. I thought that was pretty funny. And great free advertising.
I’ll check DE out. I sold some Intel stock and now I have a little cash to play with. DE sounds really good to me. I’ll probably pick up at least a few shares. Thanks for the great recommendation.
When you reach your magic 50, will you ever go over? Another good buy and adds more dividends to the pot 🙂
http://seekingalpha.com/article/2319735-dividends-dont-matter-in-retirement-either?ifp=0 read this article, I wonder what your thoughts are on this.
Damn, how can I have missed DE??? Buying right now, thanks!
Ken,
I laid out the tools I use here:
https://www.dividendmantra.com/2014/01/how-i-analyze-and-value-stocks/
Basically, I use a combination of S&P Capital IQ, Morningstar, and a company’s own investor relations site. I find a company’s own information the most helpful, as that generally gives you all you need. But S&P Capital IQ presents the last 10 years worth of financial info all in one place, which is nice. And I like to compare their fair value calculations against my own. Same goes for Morningstar.
I hope that helps.
Take care!
Jonas,
I’m not sure what you’re looking at? Operating cash flow was $3.25 billion and capital expenditures added up to $1.16 billion for FY’ 2013. That’s taken directly from Deere:
http://www.deere.com/en_US/docs/Corporate/investor_relations/pdf/financialdata/reports/2014/2013_annual_report.pdf
Mind sharing your source?
Cheers!
dividenddad,
Nice buy! I think we’ll do well over the long haul at this price, or I wouldn’t be putting my own money on the line. 🙂
The numbers are pretty solid here. I’ve been concerned over what will happen over the next cycle, but it’s really not something to worry about for the long-term investor. I think the downside is considerably more limited than the upside at this valuation, in any case.
Thanks for stopping by!
Cheers.
Joe,
Glad you found some value in the article. Would love to have another long-term investor like yourself invested! 🙂
Have a great weekend.
Best wishes.
Nicola,
I’ll likely go over a bit over 50 holdings. One thing not helping me is I’ve picked up positions over the years in companies through spin-offs, like VZ and OGS that I never intended to really buy. However, I don’t want to go much over 50 for the long haul. I may go to 54 or 55 positions here and there, but I honestly don’t want to find myself managing 60 or 70 separate investments. I find managing what I have pretty easy, and not very time consuming. But I’m not sure how that might look increasing the portfolio by 15% or 20%. And 50 positions gives me all the income diversification I’m ultimately looking for anyway.
Best regards!
Robert,
To be honest, I don’t really opine on these types of viewpoints or articles anymore. You could end up discussing this with someone for hours and get nowhere. These arguments go on ad nauseam, and I see no benefits in trying to convince anyone of anything. I simply share my journey and hope to inspire others through action.
Best wishes.
Ville,
Glad to have you on board! 🙂
Cheers.
Dear Jason. I am planning to buy 100 shares of GSK next week. All best, DD
Thanks for the analysis of DE. It isn’t a stock I’ve looked at much but will have to give it more consideration.
Regards,
Dear Dividend
Nice buy! DE laid out a pretty vision where the company is headed 5 years from now in their annual reports. I own CAT, and DE seems like it’ll compliment CAT very well.
Just curious, have you thought about publishing your watch list on here?
Cheers,
Henry
DD,
Nice!
I don’t personally have interest in pure pharma plays, but get my exposure there through the more diversified companies like JNJ. Though, if I were to add to my healthcare exposure it would probably be BDX or HCP.
Good luck with GSK. Gotta love the yield.
Cheers.
Dear Dividend,
Definitely take a look. I think it’s worth some due diligence.
Best regards.
Henry,
That’s a great question there in regards to the watch list. I could do that, but it’s not real interesting right now. There’s really only a few stocks that I follow closely that I’d love to own at some point, including NSRGY, GIS, UL, DEO, BDX, and a few others. Really not much left for me to choose from.
But I’m open to suggestions. If you feel there’s one I’m really missing out on I’d be happy to hear about it! 🙂
Thanks for stopping by. Hope you have a great weekend.
Best regards.
Hi. Thanks for a nice blog and well written posts!
I did my own analysis (in Swedish though) here: http://www.tryggframtid.nu/2014/06/analys-av-deere-company.html , bought som in mid june and added more to my position now in july.
When analysing Deere I really liked the Deere IR-pages, especially the Fact Book: http://www.deere.com/wps/dcom/en_US/corporate/our_company/investor_relations/financial_data/factbook/factbook.page . More companies should be as owner friendly :).
I will keep adding Deere to my portfolio as long as the price stays below $92.
Hi Jason,
I have calculated the free cashflow different. I substract the cash flow from investing activities (4.82 billion) of the operating cash flow (3.25 billion). There is a deficit of 1.57 billion. If I am wrong with this definition of free cashflow it would be good if you can share your source.
Best wishes
Hi Jason,
Great write up on V and DE. I was looking to buy into LVS. Have you ever done any research on Las Vegas Sands? Looks like a good buy there. After reading you DE post, I am thinking about picking up some DE shares instead. Decisions decisions, At least I have the weekend to think about it. Thanks for highlighting DE.
I hope you’re doing well,
Frank
Wow you changed your mind pretty fast since I mentioned DE a few weeks ago. Glad to have helped put it in your mind, welcome aboard!
Jeez didn’t realize the dividend hike was in May…make that a few months ago haha
Here’s an idea for your 50th position: DNKN
They just opened up their first California store and are looking to rapidly expand there. I think they are going to take a hit this earnings season which is when I will be jumping on board. Not sure if DNKN is in your area yet, but I’d say more people go there than Starbucks here.
Trygg,
Seems like you and I are both fans of DE here at this price. Glad to be a shareholder with you. 🙂
And I also enjoyed their Fact Book quite a bit. Really fun to have a clear, concise strategy laid out, and why the company can be such a great long-term investment. Keeps things focused on the long term rather than the short term.
Thanks for stopping by from Sweden! Really appreciate the support. And I’m also interested in adding at these prices. If DE stays at this level the odds are good I’ll add to it next month. We’ll see.
Best regards!
Jonas,
There’s a few ways to do it, but free cash flow is commonly derived from subtracting capital expenditures from operating cash flow. There’s a more complicated formula using EBIT and working capital, as well as other formulas, but I prefer the former for ease of use.
http://www.investopedia.com/terms/f/freecashflow.asp
I hope that helps!
Cheers.
Frank NY,
I’ve honestly never in my life once taken a look at LVS. Seems very interesting, though. I’ll have to dig in a bit here. I’m not sure if there is pricing power or specific ways to grow other than to build new casinos, but casinos are historically very profitable. I’ll take a look!
Thanks for the suggestion.
Best wishes.
Thanks Jason, I understand your aversion o the pure plays but GSK is it one of them. It has huge consumers division including aquafresh, polydent, nicorrete, breath rite, sensydyne, a n d many others. Also it has a massive global vaccines franchise w predictable earnings. Take a closer look and tell me what you think. Tim McA calls it the British j&j.
LiveNotWorkForever,
Yeah, I’ve been lukewarm on DE for a while. Same goes for CAT. And then I watched CAT take off and raise its dividend aggressively. So I maybe regret that a bit. I suppose I’m making up for lost opportunities here with DE. But the metrics look great. If there wasn’t the possibility of falling earnings over the next couple years, this would just be a phenomenal investment. Especially considering where the broader market is at. And once you stop caring about what happens in FY ’14 and ’15, because it won’t really matter that much for a long-term investor, you realize the opportunity is pretty solid.
Best wishes!
LiveNotWorkForever,
I’ll have to take a look at DNKN.
Though, a P/E ratio over 30 is rich. I really stretched myself for V at 26 times earnings.
And I’m a bit concerned about their payout ratio. The yield is fairly low, and the payout ratio is already almost 70%. Strange to see a growth play with such a high payout ratio like that, especially with a low yield. Interesting.
I’ll have to take a look! Thanks for the suggestion. 🙂
Best regards.
DD,
Hmm, interesting. Taking a cursory look at GSK, it appears that 89% of profits came via prescription drugs and vaccines. So I don’t know if I’d stretch that and say they’re a “British J&J”, but opinions will vary. JNJ is much more diversified than that, with phama, medical devices, and consumer. And it appears the dividend is all over the place. One thing I love about JNJ is the steadiness of that dividend over more than 50 years. I just love that.
But I hope GSK works out great for you. I just don’t think it’s a great investment for me and my goals.
Cheers!
DM,
Nice purchase here! Been watching this company for far too long – glad you realized the value and pulled the trigger adding a very solid company for years and years and years and.. I think you get the point. I may be purchasing a stock as well this week… we shall see come Monday – been getting antsy not making a purchase for a few weeks, you know? Doing big research this weekend on stocks and trying to think outside the box as well. Let’s hope I have a post surrounding one on Monday! Talk soon, have a great weekend and congrats on the purchase of DE again! Keep riding those tractors..
-Lanny
Lanny,
Looking forward to seeing what you decide to buy next. I hear you on getting antsy. Gotta love increasing that dividend income regularly. 🙂
Hope you’re having a great weekend over there!
Best regards.
Based on the numbers I’m looking at, DE has been in the top 10-20 DG stocks out there (and has been all year). My limited funds for investment (operating in 2 Roths) have prevented me from picking this one up. Yet. I only hope it doesn’t take off before I get the chance.
It’s interesting: there are a number of stocks that seem to always be “better values” than the rest, and certainly better values than the biggest names we all know (KO, PG, CL, WMT, MCD, etc). DE is one of these. As an investor early in their journey, I wonder if it is worth it to reach past the “all stars” in favor of better values, knowing that I may be leaving some of the best companies out there for a long time waiting for better prices. Working purely within Roth limits doesn’t leave too much room for diversification if you want to keep expenses down.
Just something I’m thinking about. Glad to see we’re on the same page with respect to value, as always.
Wow, this makes 100 comments. Better write a new article, Jason. 😉
Do you understand Morningstar’s Moat rating? They have DE rated narrow, but CAT wide. TGT is rated as having no moat whatsoever, but Kohl’s is narrow. I started to look at the Moat rating because, above all else, I invest in brands. It’s best when combined with a dividend growth stock, of course. I would have guessed that DE and CAT would both be rated as having a wide moat, so I’m missing something in the equation.
Thanks,
KeithX
Thirsty Investor,
Well, I think you’ll have plenty of time to invest in companies like KO, PG, CL, and the like if you’re still early in your journey. And I think DE with global operations and a pretty lengthy dividend streak warrants at least some attention here. Certainly not on the same page as a secular consumer stock with 50 years of dividend growth by any means, but I think there’s room in a dividend growth investor’s portfolio for a company like DE.
And value is all relative. Some companies, like CL, always trade at a high multiple. Some, like XOM, do not. Really all depends on the industry, growth prospects, earnings visibility, risk, etc. So one has to be careful to compare all stocks against all other stocks. Of course, every opportunity competes with every other available opportunity in the universe, but you have to keep perspective. 🙂
But if you’re still not too far along you’ve got plenty of time to shape your portfolio and get a firm grasp on where you want to be. And that’s half the fun. 🙂
Best regards!
KeithX,
Haha, any excuse to write an article is good enough for me. 🙂
Morningstar laid out how they determine moats a while back here:
http://www.morningstar.com/InvGlossary/economic_moat.aspx
That being said, I’m not real sure why CAT would have a wide moat and DE a narrow one. The only thing I can really think of is that CAT is a much bigger company, so perhaps due a bigger network and more sales their moat is somehow wider? But DE has a pretty large share of the market here at home, and it appears to be growing abroad. Can’t really say for sure, though, why it’s rated narrow. It’s all qualitative, and opinions can certainly vary.
Best regards.
Thanks for this post. DE is also in my buy-list, maybe next. I just bought 24 shares of PM (85,67$).
Markets are up right now and it’s not the best time to update portolio, but since 2012 when I started investing I have been buyng lot’s of Finnish dividend companys (not so many growing dividends, solid 4-5% dividend every year). Maybe I should but just keep those solid 4-5% solid companies and buying more US-growing dividend companies. When I have been reading your blog I have been getting right mindset about saving money and investing in growing dividend companies, thanks about that!
What you think what companies are reasonable price right now? I been watching PM, MCD,TGT, AFL, WMT and PG.
Im soon 30 years old and in 2013 I got dividend 567$ and now in 2014 1282$ (still counting). My portfolio is worth 43 993 $.
I just started my investment journey and with many of the same goals that you have. I just graduated college and I have a great job but I do not want to spend most of my life working. I am striving to pay off student load debt and some other things while building my portfolio. I began on June 26 by opening a Scottrade account and purchasing Apple and BP with a $500 initial investment. Since then, my investments now total $1500 and now own positions in seven companies and my yearly dividends are at $93.32. I have made adjustments since then such as investing more at a given time to reduce commission fees. I have told people that I plan to retire by 40 as well, right now I am 25, and most of them laugh at me. Although, I have explained to them the benefits of dividend investing and your blog is proof that it does work! Good job on what you have accomplished!
aawee,
Sounds like you’ve made some fantastic progress. That’s fantastic! That’s a big YOY change in your dividend income. 🙂
I like your list there. I think PM, AFL, and TGT are the most compelling out of them. And I think, obviously, DE makes sense as well. I’m actually considering WMT for a purchase here pretty soon to even it up with TGT, as I’d like TGT and WMT to be fairly even positions for me.
Nice buy with PM. I don’t see how you can go wrong with that company at this price, but I’m anxious to see how their e-cig products do in the marketplace. They’ve got the best distribution network across the world, so they should be able to do very well.
Best regards.
Daniel,
Everyone laughed at me too when I first started. Nobody is laughing anymore. Just stick to your plan. 🙂
I would definitely increase the amount of money you invest per transaction to reduce commission fees. I also use Scottrade, but I try to invest at least $1,000 per transaction, and many times more than $1,400 to bring the commission down to 0.5%.
I wish you the best of luck. One day at a time, my friend.
Cheers!
DM,
What are your thoughts on owning a more concentrated portfolio of, say, 15-20 dividend growth stocks rather than 30+? That way, you could invest more heavily in your “best ideas” rather than diluting your portfolio with companies who may be of less quality or value. I’m not necessarily advocating either way – just curious what you thought about portfolio concentration with respect to dividend growth investing.
Great blog.
Nate,
I wrote about why I invest in so many positions here:
https://www.dividendmantra.com/2014/04/why-i-eventually-want-to-be-invested-in-50-companies-income-diversification/
Bottom line, what may seem like a “best idea” today may not be a great idea tomorrow. We can’t predict the future, and thus diversification protects the downside.
Thanks for dropping by. Glad you enjoy the site. 🙂
Cheers.
Bought DE; GSK; and GE near the open today. All were down sharply. I feel good about all three. GSK div increases may be a bit bumpy but they move up slow and steady nonetheless. Specialties in respiratory heath plus 20 percent consumer products give steady slow growth. I like the consumer products jt venture w novartis. I don’t see it as akin to pure pharma play. Time will tell.
DD,
Nice moves there. I think GE and DE in particular make a lot of sense here. If they remain at these prices I’ll be pretty interested in adding to both positions next month. Neither is a huge investment for me, and I wouldn’t mind adding to both.
Best of luck with the investments, and with GSK! 🙂
Cheers.
Good buy/analysis DM. Just took a quick glance and they are number 51 on my ranking list. That is probably why I haven’t focused in on them yet, but maybe I should 🙂
DFG,
I think DE is definitely worth a look here. There’s a lot to like, but it could certainly be volatile over the next couple of years.
Thanks for stopping by!
Best wishes.
Dear Jason, just added a very small position to my existing TUP position. Added 25 shares. Do you own TUP? Current price yields a div of 3.6% All best, DD
DD,
I don’t own TUP, but I took a look at the metrics not long ago. They all looked very favorable. I probably don’t have room for this company, as I already own PG and CLX with somewhat similar product offerings. And I’ve never been a big fan of the direct-sale business model, but TUP has done well with it. That yield is obviously very nice in this current environment. Wish you the best of luck with it!
By the way, I see you put your name on the comment form. Do you want me to edit that?
Best wishes!
Yes pls, would be great if u could edit. Thanks.
Done.
DM, GSK is one of those foreign companies that keeps a weird dividend schedule, but it has been rising annually since at least 2001. Their first and second quarter dividend are the same, the third is the same or higher, and the fourth quarter is the big one. And then it gets converted into dollars.
This all causes the dividend history to look bizarre, but it’s misleading. Don’t overlook GSK just because of that.
Justin,
Hmm, that’s an interesting dividend policy. I don’t know if it’s one I particularly agree with or like, but I can see how it would definitely be misleading. However, my bigger concern is really with the business model. The dividend policy is just an annoyance, but the focus on pharma is just something I’ve never really had a keen interest in. I prefer more diversified operations (like the old Abbott or JNJ) and medical device/supply companies in this space. I just think the revenue should be more stable with those investments.
But GSK could do really well. And they may very well further diversify operations through the consumer side. We’ll see!
Thanks for adding that. Appreciate the comment!
Best wishes.
Might be to note is this news about Deere::
Berkshire Hathaway (BRK.A, BRK.B) increased its GM stake in Q3 by 21% in Q3 to 40M shares. (13F filing)
Warren Buffett’s conglomerate exited its Deere (NYSE:DE) position; it had a 4M-share stake in the tractor maker at the end of Q2.A 449K-share stake was talen in PBM services giant Express Scripts (NASDAQ:ESRX). Stakes in IBM, Wal-Mart, MasterCard, and Visa were moderately increased.GM +0.7% AH. DE -0.4%.
On seekingalpha
William,
I noticed that. I guess it’s important to remember that Buffett is running a $350 billion company, and I’m trying to achieve financial independence via rising dividend income. Slightly different goals. 🙂
If you’re interested, I actually put together a post on Buffett’s/Berkshire’s latest transactions:
http://dailytradealert.com/2014/11/15/buffetts-latest-trades-buys-12-stocks-sells-5-stocks/
Thanks for dropping by!
Best regards.