Deere & Company (DE, Financial) has been among my favourite stocks and I maintain my long-term view on the company. This article discusses the reasons to remain invested in Deere & Company and also consider fresh exposure to the stock at current levels.
The reason for discussing Deere & Company at this point in time is the fact that the stock has given negative returns of 4.4% in the last year. With the stock moving largely sideways, I believe that this is a good accumulation opportunity and the stock is likely to trend significantly higher over the next 3-5 years.
The company’s shareholder value creation through dividends is an important factor. From a dividend of $1.2 per share in 2011, the company’s dividend has doubled to $2.4 per share and the stock currently offers a dividend yield of 2.7%. With strong impending growth from emerging markets, I believe that the company’s dividend will continue to swell and Deere & Company is certainly a dividend stock for the portfolio.
When considering value creation, Deere & Company has been active on the share repurchase front with $1.5 billion in share buybacks in 2013, $2.7 billion in buybacks in 2014 and $0.6 billion in buybacks year-to-date. The buyback is important from the perspective of EPS expansion besides operations related EPS growth.
Looking into the company’s business and growth drivers, Deere & Company’s revenue has grown at a CAGR of 6% in the US and Canada for the last eight years. While this growth has been moderate in the last two years, the company’s market in Asia, Africa, Middle-East, Central Europe and CIS can be the key growth drivers in the coming years.
In particular, I am bullish on Asia, Africa and Middle-East where the company’s revenue has grown at a CAGR of 14% in the last eight years. While the Middle-East is reeling under geo-political tensions, the company’s biggest growth market is likely to be China and India over the next 5-10 years. Also, Latin America revenue has been growing at a CAGR of 14% in the last eight years and the region can be another big market along with Asia.
The point that I want to make here is that Deere & Company’s growth drivers (in terms of regions) will change in the coming years and that will drive the stock higher.
Besides the regional growth driver, the company’s growth is also likely to come through new and innovative product offering in the coming years. Research & Development as a percentage of sales has been increase for Deere & Company in the last few years and investment in research is ahead of peers. I believe that this will translate into higher margin, new product driven growth and a potential increase in overall market share over the next 5-10 years.
While the outlook is long-term, investors need to hold the stock and wait for further recovery in global growth before the stock starts moving higher and delivers strong EPS growth. At this point of time, investors can expect muted EPS growth. However, free cash flow is likely to remain robust and it will ensure that the company’s dividend remains robust and marginal EPS expansion through share buybacks continues.
In conclusion, Deere & Company is in a consolidation range for the last year and the stock has discounted muted EPS growth prospects for the near-term. Once there is more sustained global economic recovery, the stock will trend higher and I believe that the current consolidation is a good time to buy the stock for the long-term.
