Deere & Company (DE) was founded in 1837 and has not reduced its dividend payments since 1987. The company sells agricultural, construction, and forestry equipment globally under the John Deere name. The company is a member of the Dividend Achievers Index, a select group of stocks that have increased their dividend payments for 10 or more consecutive years.

Business Overview

Deere & Company operates in three primary segments: Agriculture & Turf, Construction & Forestry, and Financial Services. The Agriculture & Turf segment is by far the company’s largest. Operating profit generated through the company’s full fiscal 2014 is shown below to demonstrate the relative value of each segment to the company:

• Agriculture & Turf: 70% of operating income
• Construction & Forestry: 12% of operating income
• Financial Services: 18% of operating income

The Agriculture & Turf segment is responsible for the majority of Deere & Company’s operating income. The segment manufactures and sells agriculture and farming equipment around the world. The segment is highly cyclical, and largely dependent upon agricultural commodity prices.  Low agricultural commodity prices mean less money for farmers who in turn purchase less machinery.

The Construction & Forestry segment is Deere & Company’s smallest segment based on operating income. Like the Agriculture & Turf segment, the Construction & Forestry segment is highly cyclical. The segment’s profits are correlated with the general housing and construction industry, especially in the US.

The Financial Services segment provides leasing and financing services for John Deere retailers. The segment has grown to become the company’s second largest, and is now responsible for 18% of total income.

Competitive Advantage & Growth Prospects

Deere & Company is the second largest publicly traded corporation in the Construction Machinery industry, behind only Caterpillar (CAT).  For comparison, Deere & Company has a market cap of $31 billion while Caterpillar has a market cap of $54 billion. As the second largest player in the global construction machinery equipment industry, Deere & Company has a scale advantage over smaller competitors.

Deere & Company generates the bulk of its sales in the US, but has a presence on every continent (except, of course, Antarctica). The company has managed double digit equipment sales growth since 2007 in 3 key regions:  Latin America (14% CAGR); Asia, Africa & the Middle East (14% CAGR); and Asia Pacific, Australia & New Zealand (10% CAGR). The image below shows the global scope of Deere & Company:

Source:  Deere & Company Investor Presentation

Deere & Company is a cyclical business. The company is expected to hit a cyclical downturn in its agricultural business over the next several years.  The agricultural industry outlook for the US and Canada is down about 25% to 30% for 2015. As a result, the company is only expected to make about $7.05 EPS in fiscal 2015, versus $8.62 in fiscal 2014. In 1998 to 1999, the agricultural industry experienced a 35% decline. Deere & Company saw income plummet nearly 80% in the decline.

Fiscal 2014 actually marked the first year of the agricultural industry decline. Deere & Company realized record EPS of $9.08 a share in 2013. The company’s EPS declined slightly in 2014 as the agricultural industry entered a cyclical downturn. The company has prepared itself for this downturn much better than it was prepared in the late 90’s. Deere & Company is better diversified, with operations in construction and financing set to buffer the cyclical trough in agriculture. Estimated 2015 EPS of $7.05 versus peak earnings of $9.08 in 2013 is only a decline of about 25%, much better than previous income declines.

Deere & Company has excellent long-term growth potential. As the global population continues to rise, the demand for food will rise. Deere & Company’s long-term outlook is bright as the world will likely see population rise long-term.  Deere & Company is well positioned globally to profit from greater long-term food needs. More mouths to feed means more farms, and more agricultural equipment.

Dividend Analysis

Deere & Company currently has a dividend yield of about 2.7%. The company has a payout ratio of just 27% of current EPS, or 35% of expected fiscal 2015 EPS. Despite a rough 2015 ahead, Deere & Company’s dividend is in no danger at all thanks to the company’s conservative payout ratio.  In fact, Deere & Company has the opportunity to raise its dividend payment at the trough of its cyclical downturn.

Deere & Company has grown its dividend payments at about 15% a year over the last decade. The company has grown revenue per share at 10%, and EPS at about 12% over the same period. I expect Deere & Company to continue solid high single-digit or low double-digit EPS growth over the coming decade, as it recovers from its cyclical trough. The company’s dividend payments will likely keep growing at a double-digit pace over the next several years.

Valuation

The stock market likes predictable growth year in and year out.  With Deere & Company’s EPS next year scheduled to fall (despite favorable long-term prospects), the company is trading at a steep discount. Deere & Company currently has a P/E ratio of just 10.1. The company’s P/E ratio using estimated 2015 earnings is still just 12.4.  It is a rare occurrence to be able to purchase a business with a long history of rewarding shareholders through rising dividend payments for such a low P/E ratio. Deere & Company appears to be a great value at current prices as its future cash flows are being unfairly discounted due to short-term anticipated underperformance.

Final Thoughts

Deere & Company does not follow the growth-every-year pattern that a company like Coca-Cola (KO) or Johnson & Johnson (JNJ) does.  Nevertheless, Deere & Company is a high quality business and has the second highest market share in its industry, behind Caterpillar. The company’s cheap price, above average dividend yield, and conservative payout ratio give it a high rank using The 8 Rules of Dividend Investing. The company makes a sound investment for investors with a time frame longer than 1 to 2 years ahead.