Deere Hikes Dividend

Deere & Company ( DE - Analyst Report ) has upped its quarterly dividend by 5 cents to 46 cents. This marks the tenth consecutive year of the company’s dividend hike. The increased dividend will be payable on May 1, 2012 to shareholders of record as on March 30, 2012.

The dividend increase, which translates into a 12% raise from the prior dividend of 41 cents, came after nearly nine months. On May 24, 2011, Deere increased its dividend by 6 cents to 41 cents.

Deere reported earnings of $1.30 per share; an improvement of 8% from the prior year quarter of $1.20. Results exceeded the Zacks Consensus Estimate of $1.23.

The company’s worldwide total sales were recorded at $6.8 billion, which increased 11% year over year. Total revenue outperformed the Zacks Consensus Estimate of $6.49 billion.

The improvement in the first quarter results of fiscal 2012 was attributable to several factors. The company performed well across all its segments. In addition, healthy demand for farm machinery also contributed to the performance.

Deere started 2012 on a good note with a strong performance in the first quarter. It sets a net income target of $3.275 billion for 2012. The Zacks Consensus Estimate for second quarter 2012 earnings per share is $1.01.

The company is intent on providing consistent cash dividends, thereby increasing shareholders value. It expects to deliver increased dividends targeting an average payout ratio in the band of 25%-30%. Deere expects nearly $3.5 billion cash flow from Equipment Operations in 2012.

Current annualized dividend yield of Deere is 1.97%. Caterpillar, the nearest peer of Deere, lags behind it with an annualized dividend yield of 1.59%. Deere’s dividend payout ratio of 22.63% is less than Caterpillar’s 23.86%. Caterpillar had increased its dividend by 12% in June 2011 to 46 cents per share.

Deere has a better cash and cash equivalents of $3.4 billion compared to $3.1 billion of Caterpillar. Deere commands industry leading net margins, its trailing twelve months’ net margin of 8.74%, surpassing Caterpillar’s 8.32% and the industry margin of 7.24%. We thus believe Deere has ample scope to increase its dividend yield and payout ratio.

R&D expenses increased 16% year over year in the first quarter of 2012. R&D spending is expected to be up by 12% for the year. The expenses are expected to remain high for the next few years also as Deere approaches significant product launches with Interim 4 engines and meets final Tier-4 emission standards.

The shares of the company currently retain Zacks #2 Rank (short-term “Buy” recommendation). It competes with the likes of Caterpillar Inc. ( CAT - Analyst Report ) , CNH Global NV ( CNH - Snapshot Report ) and Kubota Corporation ( KUB ) .

Illinois-based Deere & Co., is engaged in the production and distribution of agricultural and forestry equipment, construction equipment and engines worldwide. The companysells products in the U.S. and Canada through branch offices as well as through distributors and dealers for the resale of products internationally. Deere & Co.’s credit subsidiary, John Deere Capital Corporation (JDCC) is one of the largest equipment finance companies in the U.S. with more than 2.4 million accounts. Deere currently reports operating results under the three major business segments like Agriculture and Turf segment, Construction and Forestry segment and the Credit segment.