Monday, June 2, 2014
Weekly Purchase - DE
I purchased new Deere shares today being very impressed with last week's dividend boost. DE trades at 11.9 times forward earnings which is pretty darn cheap on an absolute basis. It comes standard with a very attractive yield of 2.6%, especially when you consider that over the past 5 years Deere's yield averaged only 2.0%.
I calculate shares to be worth approximately $103.50.
The catch is that DE is highly cyclical. Earnings are actually supposed to decline the next few years. During the past twelve months EPS was a solid $9.15 per share. However DE is expected to earn $8.51 in fiscal year '14, then $7.69 in fiscal year '15. That being said, I really like this business as a long term investment. The fact is the world's population and standard of living will only rise over time. A nice tailwind for farm equipment manufacturers like John Deere. You'd have to think they'll be selling more tractors 20 years from now. I could be wrong, but it's hard for me to imagine a different scenario.
Anyways Deere maintains a very low payout ratio because it places more emphasis on stock buybacks and because earnings fluctuate so much. Management isn't stupid, this business doesn't sell steady demand products such as toothbrushes and toilet paper. I expect dividends will continue to grow over time, but I'm prepared for sporadic intervals which I wouldn't tolerate from other holdings.
DE now has an income weight of only 0.48% for me.
Core Position: No
Speculative Position: No
Expectations: Steady income; 8% (average) annual dividend growth
Automatic Sell: Dividend cut
Consider Selling: Frozen dividend, business fundamentally changes, management becomes untrustworthy, fundamentals deteriorate, wildly over valued stock price, or position fails to meet expectations