Deere & Co. (DE), in an effort to enhance value for its shareholders, hiked its quarterly dividend by 2 cents to 30 cents. This translates to a 7% increase from the prior dividend of 28 cents. The increased dividend will be paid on August 2, 2010, to stockholders of record on June 30, 2010. This brings the new dividend yield to 2.1%.
The dividend increase does not come as a surprise. During the earnings call on May 19, management had said that it would make use of its cash balance of $3.6 billion toward investments in growth opportunities. Management expressed its intentions to moderately increase and pay steady dividends to its shareholders and also explore the possibilities of share repurchases, once it becomes comfortable with its liquidity position given the external market environment, particularly in the capital markets.
Deere has a consistent track record of paying quarterly dividends, supported by its cash position and its ability to generate healthy cash flow. The current dividend comes after a hiatus of one year. The last dividend hike of 12% to 28 cents was announced on May 28, 2009. The company has increased its dividend payout from 11 cents in 2003 to the current 30 cents in 2010, a total dividend growth of 173% through the years.
Deere’s current annualized dividend yield of 2.14% lags its nearest peer Caterpillar Inc.’s (CAT) annualized dividend yield of 2.84% by a small margin. Deere’s dividend payout ratio of 48.02% is much less than Caterpillar’s 83.71%.
However, Deere is in a cash-rich position compared with Caterpillar. It is armed with cash and cash equivalents of $3.6 billion compared with the latter’s $3.5 billion. Further, Deere commands industry leading net margins, its trailing twelve months’ net margin of 4.31%, surpassing Caterpillar’s 3.85% and the industry margin of 2.62%. We thus believe Deere has ample scope to increase its dividend yield and payout ratio.
We appreciate Deere’s focus to create long-term value for its investors. Deere’s strong cash-flow positions the company well to fund future growth opportunities as well as return cash to shareholders. Given Deere’s cash reserve of $3.6 billion and $2.5 billion of cash flow from its equipment operations projected by management for 2010, we believe it has a sufficient source of liquidity to meet its funding needs. Deere can thus continue to pay dividends and we also expect it to resume share repurchases or pay down debt, thus benefiting its earnings.
However, Europe’s sovereign debt crisis and the weak Euro could negatively impact the company’s results given its international operations. Deere’s guidance for fiscal 2010 assumes a USD/Euro exchange rate of $1.34, but the company noted that if the Euro weakens to a range of $1.27–$1.15, it would expect a favorable $7 to $22 million operating profit impact.
We remain positive on Deere given its strong performance even during challenging business conditions due to its focus on developing a more flexible cost and asset structure. Deere has been involved in an ongoing push to streamline production, improve efficiency and has been focused on improving returns on capital and cash-flow generation. We feel the benefits of Deere’s extensive restructuring efforts will show through strongly as volumes begin to improve and will provide upside to earnings.
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