Monday, June 16, 2014

Recent Buy

Whenever I make a new purchase for my portfolio I feel it's only fair to get a post written giving all of the juicy details. I want to be as transparent as possible with my journey to reach financial independence through dividend growth investing. Being open about the moves I make allows for better discussion with all of you and helps spread ideas around as well as letting me create my own "investing journal" to chronicle why I purchased a company in the first place and that way I can revisit if something changes and make the decision on whether to continue owning the company or not.  On Wednesday of last week I initiated a new position in Deere & Company (DE) (Full Analysis Here as of 12/2013).

I purchased 18 shares of Deere for $91.46 per share which gives me a per share cost basis of $91.90 after commission.  Based on the current annual dividend of $2.40 these shares will provide $43.20 in annual dividends and carry a YOC of 2.61%.

I've been looking at Deere & Company for a while now and I'm glad to welcome the shares to my portfolio.  I was very close to buying earlier, and for much better prices, but then management came out and said there would not be a dividend increase.  Not even a token one.  I should have taken another look at Deere because this has happened before with Deere where they kept the dividend the same for 6 quarters before increasing it 3 times in less than 2 years.  It would have been a bit of a riskier move to purchase more with a frozen dividend; however, I really liked the openness of management.  Too often you won't hear management talk about the issues really facing the company and rarely are they straightforward in their reasoning if there's bad news to report.  Well in late May Deere raised the dividend after just one payment at the frozen level.  And what a raise it was.  The latest increase was from $0.51 quarterly to $0.60 or 17.6%.  This gave me the confidence to go on and purchase some shares.

As usual, shares of Deere have sold off a bit since I made the purchase but that's fine because it's not up to a full position size yet so I'll be looking for a chance to average down my cost basis.  Just some quick stats based on Friday's closing price from Yahoo!Finance.

TTM P/E  9.89
Foward P/E 11.76
PEG (5 years) 1.33
Cash per share $9.05
TTM ROE 36.61%
Dividend Yield 2.70%

The first thing you'll notice is the forward P/E ratio being higher than the TTM P/E.  Analysts are expecting a decline in earnings per share due to headwinds in the industry agriculture industry.  Like most businesses tied to commodities this is something shareholders have to deal with as commodity prices tend to be more volatile and in the case of agriculture is very dependent on issues out of their control.  The good news is that the new increased dividend only represents a 31% payout ratio based off the consensus analyst estimate of $7.69 EPS for FY 2015.  Analysts are still calling for 5 year compounded growth of earnings of 8.00% per year.  If DE continues to repurchase 2-3% of their outstanding shares that would allow for 10% dividend increases and keeping a constant payout ratio.  That's fine by me.

I couldn't tell you if a Deere tractor runs better than any other tractor you can buy, but I can tell you that everyone knows a Deere when they see it.  Even the "city" folk.  The name John Deere has become ubiquitous with farming equipment and everyone wants one.  If you ever drive through the country and past farms you'll see plenty of John Deere tractors which bodes well for the future of Deere and its' shareholders.

My FI Portfolio's forward 12-month dividends are now at $4,417.20 which is 88.34% of the way towards my goal of reaching $5,000 by the end of the year.

I've updated my Portfolio page to reflect this addition.

Have you been making any purchases in this rather heated market?

18 comments:

  1. I'm glad you took the plunge JC. We've been talking about Deere for 4 or 5 months now. It is a powerful brand for sure! Best of luck with your new investment
    -Bryan

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    Replies
    1. Bryan,

      Definitely a powerful brand! Everyone wants a John Deere tractor. I'm hoping to purchase some more sub-$90 before the ex-div date.

      Thanks for stopping by!

      Delete
  2. Congrats on the purchase. I have not looked at manufacturing companies (other than GE), but this definitely sounds like a good stock to get in.

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    Replies
    1. DGJ,

      DE is good but they're going to be much more cyclical in nature than GE due to GE's huge diversification compared to DE. Really like them for the long term even though the short term might be a bit rough.

      Thanks for stopping by!

      Delete
  3. JC,

    Looks like a nice buy!

    I've been lukewarm on DE lately because of the forecasts calling for lower earnings over the next couple of years, but DE still looks solid as a long-term play here. As you mention, even on lower earnings the payout ratio is still very low and the company should be able to continue growing dividends for the foreseeable future.

    Best wishes!

    ReplyDelete
    Replies
    1. DM,

      Since DE is heavily tied to agriculture/commodities occasional drops in earnings are to be expected. I definitely wouldn't consider it a KO/PG steady as she goes company. But the dividend is still well covered by earnings even if they do drop to the average analyst forecast so there's still plenty of room to increase it further.

      Thanks for stopping by!

      Delete
  4. I think this is a good time to accumulate DE shares. By the time EPS growth returns, the share price may be way up and too expensive to accumulate. Buy cheap and keep!

    ReplyDelete
    Replies
    1. ADY,

      I'm really hoping to add some more soon but we'll see how the share price acts. I think this is definitely one where you'll have to front run the turn in the ag market and subsequently the farming equipment market.

      Thanks for stopping by!

      Delete
  5. Congrats on becoming a fellow shareholder! I really like the company and products. I just wish I'd picked up more for a cheaper price. With cyclical business you can expect 6 quarters in a row of the same dividend every once in a while. I wouldn't get too worried unless they broke the YOY streak.

    ReplyDelete
    Replies
    1. Brent,

      Isn't that always the case? I always want more for a cheaper price. Especially when it comes to dividend growth companies. Cyclical businesses will definitely take you on a wilder ride, but the good thing is that if you have faith that management can weather the bad times then you can get rewarded handsomely by adding on the dips. Because there's definitely a lot more dips in the cyclicals than the consumer staples.

      Thanks for stopping by!

      Delete
  6. Finally a recent buy I can get behind. I have always liked DE as a long tern dividend holding. I never pulled the trigger on it because I went with similar company CAT. This is like the PG or UL decision many bloggers write about. Both are great companies but sometimes you want to own only one in a specific sector. I do like DE over the TGT and ARCP choices a lot of bloggers are making in recent weeks. Thanks for sharing.

    ReplyDelete
    Replies
    1. DivHut,

      Well as far as PG/UL is concerned I'll gladly own both. I owned CAT but got tired of management. DE seems to be much more open about their operations which I find to be a huge plus.

      Thanks for stopping by!

      Delete
  7. JC,

    Nice buy! I've been a long term holder on DE as well. Initiated my position of 6 shares on 07/02/2008 at $70.79 and then a few months later bought 4 more shares at only $38.23. I wish could find those prices again. CAT was around $30 back then and I think I even had a BA dividend reinvest under $30.

    ReplyDelete
    Replies
    1. SWAN,

      Dang, talk about a sentiment change. Of course that was in the midst of the market starting to implode. I'd be happy with prices from early 2013 but of course 2008/9 prices would be awesome right about now. Unfortunately I don't think we'll be seeing those unless/until the economy implodes again.

      Thanks for stopping by!

      Delete
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    ReplyDelete
  9. I'm tepid on John Deere, but there are few alternatives and none with better brand recognition.

    ReplyDelete
    Replies
    1. WE,

      It's a bit of a concern with forecasts for declining earnings over the next year or two but the dividend will still be well covered if the forecasts are in the ballpark. Cyclicals are harder to own than the consumer staples because there's usually much wilder swings in the share price which opens the door for investor psychology to start messing with your head. And you're right they definitely have brand recognition!

      Thanks for stopping by!

      Delete
  10. Congrats officially on this purchase! I'm still thinking of adding more DE if it drops a little, I'm also looking at starting a position in IBM since I have zero tech holdings. Hope all is well and have a great weekend!

    ReplyDelete