After a Big Dividend Increase, Deere Can Run

Deere is poised to profit from the extremely favorable tailwinds behind the agriculture industry, and proved it by significantly increasing its dividend.

May 31, 2014 at 3:20PM

Farm machinery maker Deere & Company (NYSE:DE) has a number of catalysts working in its favor. Most prominent of which is the undeniable tailwind at the back of the global agriculture industry. Populations across the world are growing rapidly, particularly in the emerging markets. It goes without saying that all these people need to eat. And, as emerging economies expand and millions of people enter the middle class, diets increasingly become protein-based.

To be exact, Deere estimates that the global population will swell to 9 billion by 2050, up from 7 billion currently. A full 70% of the world will be living in cities, and Deere management expects the world's growing, more urban-based population will enjoy higher living standards. In response, Deere will be relied upon to offer products and services that help meet all this demand for more food, fuel, and shelter.

Put it all together, and it's clear that Deere will benefit greatly from all this increased demand. Management proved as much by significantly raising its dividend. A company's dividend policy is a signal of how management sees the future shaping up. If Deere's recent financial performance and its dividend announcement are any guide, the company has a profitable road ahead of it.

In the right place at the right time
Deere will surely be able to capitalize on what's likely to be intense future demand for food. Global populations continue to soar, by tens of millions of people every year. And, since there's only so much land available for food production, the stress on crop yields virtually requires Deere's farming equipment and services. Plainly stated, Deere should do well simply because of the industry it operates in.

On the other hand, one of Deere's competitors in the heavy equipment space, Caterpillar (NYSE:CAT), is in the wrong place at the wrong time. Caterpillar is very reliant on the mining industry, which is proving very problematic. Prices for several precious metals, including gold and silver, have declined significantly for more than a year. This has resulted in a huge drop in global mining activity, and is weighing on Caterpillar's results.

Caterpillar reported flat sales in the first quarter, year over year. Caterpillar has struggled for some time, and will continue to struggle, because of the headwinds facing mining. Sales fell 16% last year, and the company expects difficulties to remain this year as well. The company's 2014 outlook of $5.55 per share in earnings would represent a 3% decline from last year. And, it's worth noting that Caterpillar's EPS fell 32% last year versus 2012.

Caterpillar's decline is moderating, but Deere is having no such problems. Deere grew revenue by 5% in 2013, after 13% revenue growth the previous year. Deere's profits jumped 15% last year, and 2013 represented Deere's third year in a row of record profits.

Deere sees great things yet to come
Not only has Deere done extremely well over the past few years, but it expects strong results for the foreseeable future. To demonstrate its confidence, Deere recently jacked up its dividend by 18%. This represents the 12th dividend increase in the last 10 years.

Along with the increase, Deere CEO Samuel R. Allen stated that his company is well-positioned to reap the rewards from the favorable agricultural trends over the long term. In addition, the dividend increase reflects his confidence in the company's ability to generate strong free cash flow going forward.

Foolish final thoughts
The world's population is expanding, and so are several under-developed economies, particularly in Asia and the Middle East. As a result, the world needs farming equipment and services, and Deere will be there to solve the complex agricultural needs across the globe.

Deere has executed strongly over the past few years, and will continue to do so. To demonstrate management's confidence in the future, the company raised its dividend by a hefty amount to reward shareholders. Deere's huge dividend increase is a great signal that the company has very profitable years ahead of it.

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Bob Ciura has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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