Deere & Co. in an effort to return more value to its shareholders hiked its quarterly dividend by 5 cents to 35 cents. This translates to a 17% increase from the prior dividend of 30 cents. The increased dividend will be paid on February 1, 2011, to stockholders of record on December 31, 2010. Deere’s shares jumped 1.9% to $76.14 on the news.
The dividend increase does not come as a surprise. During the earnings call, on November 24, management had stated that it intends to deliver a series of moderate dividend hikes while targeting an average 25%–35% pay out ratio.
Deere has a consistent track record of paying quarterly dividends and has been increasing its dividend every year since 2004, supported by its cash position and its ability to generate healthy cash flow. The last dividend hike came in May when the company boosted its quarterly dividend by 2 cents to 30 cents, a 7% increase.
The company has increased its dividend eight times in the span of 2004 to 2010, bringing up its dividend of 11 cents to the current level of 35 cents, reflecting a total dividend growth of 218%. In the 2004-2010 timeframe the company has returned $2.67 billion to its shareholders through dividends.
Deere’s nearest peer, Caterpillar Inc , had upped its dividend by 2 cents or 5% to 44 cents in June 2010 after a gap of two years. Deere’s current annualized dividend yield of 1.6% lags Caterpillar’s annualized dividend yield of 2.1%. Deere’s dividend payout ratio of 27% is much less than Caterpillar’s 56%.
However, Deere is at a cash-rich with a cash horde of $3.79 billion compared with Caterpillar’s $2.3 billion. Further, Deere commands industry leading net margins; its trailing twelve months’ net margin of 7.17% surpassed Caterpillar’s 5.31% and the industry margin of 5.16%. We thus believe Deere has ample scope to increase its dividend yield and payout ratio.
We appreciate Deere’s focus on creating long-term value for its investors. Deere’s strong cash flow positions the company to fund future growth opportunities as well as return cash to shareholders. Given Deere’s cash reserve of $3.79 billion, we believe it has ample liquidity to meet its funding needs.
Deere can thus afford to pay dividends and, we believe, resume share repurchases or pay down debt, thus benefiting earnings. We currently have a Zacks #3 Rank (short-term Hold recommendation) on the stock.