This week, agriculture equipment powerhouse John Deere (NYSE:DE) hiked its quarterly dividend by 17%. The yield is now 1.97% (which still beats a typical rate at your bank account). Since 2004, the company has increased its dividend nine times.
Deere also announced plans to expand its footprint in emerging markets. To this end, the company will spend $60 million to build a new engine factory in China. If anything, it looks like this is just the start to a big push in the country.
What about the results for shareholders? Well, Deere’s stock price is up nearly 55% over the past year. Yet there has been some turbulence lately.
Is this a buying opportunity, or should investors hold off? Here’s a look at the pros and cons:
Diverse offerings. When it comes to agriculture equipment, Deere covers vast market segments. It has loaders, combines, harvesters, balers and mowers. It even has irrigation equipment, management systems and power products.
Deere also has equipment for the forestry and construction industries. These include earthmovers, backhoe loaders, excavators and log skitters.
Secular drivers. The long-term prospects for agriculture look promising. Worldwide population continues to grow, putting pressure on food production. At the same time, weather conditions have worsened and it’s getting tougher to improve yields on existing crops. As a result, the general income of farmers has been rising, which means there should be more demand for equipment from Deere.
Growth forecast. The goal for Deere is to double revenue by 2018, which would come to about $50 billion. Moreover, the company wants to increase its profit by at least three times current levels. A key part of the strategy will be global expansion.
Credit risk. Deere provides substantial amounts of financing to its customers. No doubt, this is a great value-add and a nice profit source. But there are certainly default exposures.
Costs. Deere is a huge buyer of many commodities like steel, iron castings and forgings. Such commodities have seen hefty price increases and even some supply problems. In fact, to deal with this, the company has invested in its strategic sourcing capabilities.
Environmental laws. Deere must handle many complex regulations. Perhaps the most significant are those regarding greenhouse gas emissions. To be in compliance — as well as anticipate changes in the laws — the company has had to redesign many of its products. Of course, this means higher costs as well as possible limits on the performance of its equipment.
Investing in agriculture commodities can be difficult. The main approaches involve futures and options (although, there are some interesting exchange-traded funds popping up).
So a good way to benefit from the growth in agriculture commodities is to buy a stock like Deere. And for the most part, it is hard to find fault with the company. It has solid financials and a high-quality line of products.
But the biggest opportunity is in global markets. With the company’s strong cash flow, it will have the wherewithal to bolster this business.
In light of the long-term prospects, the pros outweigh the cons on the stock.
Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.