What’s the Price of Corn Got to do with Deere’s Dividend?

Deere & Co. (DE) shares have softened in the past few months, as investors worry Europe’s economic troubles will take a toll on the farm-equipment giant’s profits. The stock’s also under pressure because, even though Deere’s sales to cash-rich U.S. farmers continue to boom for now, the domestic sales rate isn’t sustainable: eventually –- maybe as soon as next year –- the replacement cycle will start to wind down because most of the farmers who needed a new combine or tractor will have bought one.

Given the stock’s pullback, and Deere’s helpful but nothing-special current 2.44% dividend yield, income investors may be tempted to steer clear. Deere’s dividend provides more value than a casual glance might suggest, however, because the company regularly raises its dividend payout.

Directors have bumped up the dividend ten times over the last eight years.

DE Dividend Chart

DE Dividend data by YCharts

Yield junkies gravitate to companies that reliably raise their dividend because they known that over time, dividend increases magnify the yield that long term investors receive. In Deere’s case, for example, shares purchased six years ago (when the stock was trading at $39.33 and the yearly dividend was 78 cents) provided a 1.98% dividend yield. Now, with Deere’s yearly dividend having grown to $1.84, those mid-2006 shares are offering their holders a 4.7% effective dividend yield. Barring a major future dislocation at Deere, today’s buyers can hope to see a similar improvement in their payout.

Deere’s earnings have been very strong over the past couple years, but the company’s not immune to economic trends.

DE Net Income Chart

DE Net Income data by YCharts

Truth is, the best predictor of Deere shares may be grain prices, which have eased lately but remain strong by historical measures. Even after its decline, Deere’s stock has tripled in the past decade, rising in concert with commodity grains.

DE Chart

DE data by YCharts

For several years now the company, and the U.S. farm economy in general, have been benefiting from positive, structural shifts in the world agricultural marketplace. Rising living standards in many emerging economies are causing a surge in demand for grains and food, generating big sales growth not just for Deere and its farm-machinery rivals, but for producers of fertilizer, seeds, irrigation equipment, farm chemicals and other ag-related goods. There’s little reason to think those global dynamics will reverse.

Whenever we invest in a company to capture its dividend, we also acquire its underlying shares, of course. Before buying any stock, it’s important to thoroughly research its operating fundamentals, and to read through its 10-K report.

James P. Miller is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.

Read more articles about: Company Analysis  

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