I have to admit that I feel incredibly blessed right now. To be able to take a break from conventional work to focus on writing is such a gift, but to be able to continue my investment activities takes it to another level of gratitude.
I’m not making nearly as much as I was when I was working for a luxury car dealership, so it’s unlikely I’ll be able to keep pace with my former scope of operations where I was investing upwards of $3,000 or more per month. But if I can continue socking away $1,300 or so per month while enjoying what I do I’ll be extremely happy.
This all being said, I was able to scrounge up enough cash to make a purchase early this month. The market has oscillated a bit lately, and this has opened up a number of opportunities that I felt were moderately overvalued prior to the recent swoon. However, I decided to stick to my watch list and put capital to work in a company I was freshly familiar with after some recent research and a subsequent purchase.
I purchased 15 shares of Deere & Company (DE) on 8/4/14 for $85.10 per share.
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%).
I’m going to diverge a bit from my usual ‘Recent Buy’ article format where I discuss the quantitative fundamentals and qualitative aspects of a company, which would explain my reasoning and logic.
And the reason why is I just went over all of this as I initiated a position in this company less than one month ago. To repeat myself would be a waste of your time as well as mine.
Instead, I’m going to take a little time today to explain why I averaged down on Deere. While Deere’s price per share didn’t drop substantially after my purchase, it was a rather sudden pullback immediately after purchasing. Now, when this happens you will either wonder if you made the right choice or it will make you excited.
If a stock drops, say, 5% or 10% soon after a purchase and you’re shaking in your boots, it’s quite possible that you either don’t appreciate cheaper stocks or you don’t have the necessary conviction to buy and hold the stock in the first place. There’s nothing really wrong with that, as most people would prefer seeing a stock meteorically rise after a purchase.
As a value investor, however, I’m quite different. I prefer a stock I buy to stay relatively static in price, or even drop in price, long after I purchase it. This gives me the opportunity to continue allocating capital to that company and build a position over time at an attractive price. If the stock continues to shoot up that means the subsequent capital I’m putting to work becomes less and less effective as it buys less shares, and with that, less yield and dividends.
But you have to have conviction in your ability to analyze and value a company, and conviction in the company to execute. If you lack that conviction then a quick drop in its share price will leave you uneasy, at best.
I personally get excited when I buy shares in a company and it drops after my purchase. If I like a stock at $X, then surely I must love it at less than $X, right? Right.
This gives me an opportunity to buy additional equity in a high-quality business for more money, which means my capital goes further by buying more shares at a higher yield with more dividend income. And the higher the dividend income, the closer I am to financial independence, not only today but forever. That higher dividend income means more passive income hits my account soon thereafter, giving me more firepower for subsequent purchases. And those larger subsequent purchases provides more future dividend income as well. That doesn’t even factor in all the dividend raises.
Cheaper stock prices are your friend, assuming the quality is high and a company has excellent future prospects for future profit growth, and with that future dividend growth. I’ll never shy away from a good chance to average down on a position I already own if Mr. Market becomes moody and gives me the opportunity. And I don’t think you should either.
The P/E ratio based on my purchase price is just 9.31, which is obscenely low in today’s market. It’s so low because earnings are forecast to drop over the next two fiscal years, due to a possible drop in demand for Deere’s products and price weakness in certain commodities, such as corn. But if one is investing for the next 20 or 30 years, this matters very little. In fact, it provides even more opportunities for averaging down, as I was discussing above.
I valued shares last month using a dividend discount model analysis with a 10% discount rate and 7.5% long-term dividend growth rate. I think that growth rate is far as it’s far below what DE has posted in growth for both earnings and dividends over the last decade. Even a drop in profitability over the next couple of years doesn’t really skew the long-term picture all that much. The DDM analysis gave me a fair value on shares of $103.20, and I obviously think it’s still appropriate. I believe think the margin of safety right now is definitely large enough to cushion any future volatility in earnings. The yield on my purchase is 2.82%.
As I spoke about before with Deere, I think the future looks bright. It’s a virtual guarantee that more people will inhabit this planet in the near future. And these people are going to be hungry, right? Well, that’s where Deere comes in. They provide the equipment necessary for farmers to put food to table. And as more and more people inhabit the planet, there’s less room to grow the food necessary to feed everyone. Deere predicts a future where farming will be increasingly mechanized, which bodes well for a dominant company that produces the machinery.
This purchase adds $36.00 to my annual dividend income total based on the current quarterly dividend of $0.60 per share.
My portfolio still holds 49 positions, as this was an addition to an existing investment.
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 September to reflect this recent purchase.
Full Disclosure: Long DE.
What are your thoughts? A fan of DE at this price?
Thanks for reading.