This Resilient Dividend Shares' Value Gains 21% in Three Months. Understand Why It's Worth Considering as a Purchase in December.
This Resilient Dividend Shares' Value Gains 21% in Three Months. Understand Why It's Worth Considering as a Purchase in December.
Following a three-year slump, John Deere's (DE -0.87%) shares soared to a new record high on November 25, 2023, following the release of its fourth-quarter and 2024 financials (обновлено до октября 27). However, Deere's net income decline by more than 30% in fiscal 2024, and the organization's leaders anticipate even lower profits in fiscal 2025.
Here's why John Deere's stock is on the rise while its earnings are falling and why it is a solid dividend stock to buy now.
Expectations rule everything
Fully understanding the importance of expectations is essential for becoming a successful investor. As an example, consider Nvidia, which reported outstanding third-quarter earnings on November 20 and raised its annual outlook. Despite this, the stock has since decreased in value because investors' expectations for the GPU guru were even higher.
In contrast, investor expectations for Deere have been rather subdued for some time. The agriculture, forestry, and construction equipment giant entered a cyclical growth phase at the end of 2020 as commodity prices for products such as corn, soybeans, and wheat surged, resulting in increased spending among Deere's core customers. In fiscal 2021 and 2022, Deere's earnings skyrocketed before reaching an all-time high in fiscal 2023. However, due to the significant growth in the stock price during 2021, the stock failed to sustain its increase even as earnings continued to climb.
In essence, Wall Street expected Deere to deliver unparalleled earnings growth, which it did. But once an excessive amount of capital spending was moved forward from future years, a slowdown was to be expected.
When Deere announced its fiscal 2023 results on November 22, 2023, it projected net income of $7.75 billion to $8.25 billion for fiscal 2024. Throughout the year, this estimate was reduced, and the organization ultimately reported $7.1 billion in net income. In its fiscal Q4 report on November 21, Deere predicted fiscal 2025 net income of $5 billion to $5.5 billion, which would represent a 26% decrease at the midpoint from fiscal 2024 and an astounding 48% decrease from fiscal 2023.
However, this forecast range is still significantly higher than what Deere was earning prior to the pandemic. Moreover, at its current market cap of approximately $126.5 billion, $5.25 billion in net income would translate to a price-to-earnings ratio of around 24. This is a fairly reasonable valuation for a market-leading company that anticipates another year of lower earnings.
Overall, John Deere's stock may be experiencing a resurgence due to investors' expectations potentially being even lower than what the company ultimately delivered. Management also provided some encouraging commentary during the earnings call.
Changing the tide
During the question-and-answer segment of John Deere's fiscal Q4 earnings call, several analysts posed inquiries focusing on the specifics of Deere's forecasts, particularly in terms of the quarter-by-quarter breakdown.
Because Deere's earnings were weaker in the second half of fiscal 2024 compared to the first half, Deere's comparable results will appear more favorable as it moves through the next year. In fact, there could even be a slight increase in the second half.
Deere was also questioned about how the new U.S. administration would influence its operations. John May, the company's CEO, noted that more than 75% of all products sold by Deere in the U.S. are manufactured in the U.S. – making the company well-prepared if tariffs increase the cost of imported heavy machinery and earth-moving equipment.
In summary, Deere expects its results to be barely changing as it approaches the second half of the fiscal year, which could indicate a return to growth in fiscal 2026. If this happens, John Deere stock could begin to seem inexpensive.
Deere remains an excellent long-term investment
John Deere has a strong history of reinvesting in its business, investing in technological innovations in automation, increasing its dividend, and aggressively purchasing back stock. Given that the stock had remained stagnant for an extended period, a rally made sense on the assumption that the company's earnings downturn could conclude by the end of the fiscal year.
However, there is still a significant amount of uncertainty related to demand pressures across John Deere's three business units – production and precision agriculture, small agriculture and turf, and construction and forestry. Although John Deere conducts a considerable amount of manufacturing in the U.S., it has a substantial international business that could be impacted if other countries retaliate against U.S. tariffs by establishing trade barriers on U.S. imported goods.
For these reasons, investors should approach John Deere with a long-term perspective and avoid becoming overly preoccupied with the timing of its forecasts. Its dividend, even at the current share price, may yield just 1.5%, but its capital return program also includes robust buybacks. One of the reasons John Deere remains an excellent bargain today is that it has reduced its share count by more than 20% over the past decade, allowing its earnings per share to grow at a faster rate than its net income.
Investors can find higher-yielding alternatives in the industrial sector, but few businesses in the sector boast the market leadership and innovative culture of John Deere. This stock is looking like an excellent buy for investors seeking a growth-focused company that can weather the inevitable market cyclicality.
Given the current market conditions and Deere's financial projections, some investors might consider reallocating their finance resources towards Deere, viewing it as a promising long-term investing opportunity. Even with the predicted decline in net income for fiscal 2025, Deere's dividend and share buyback programs provide potential returns, making it an attractive option for income-focused investors looking for growth in the industrial sector.