This Unstoppable Dividend-Paying Growth Stock Is Up More Than 260% in 5 Years. Here's Why It Just Hit an All-Time High.

Shares of Deere & Company (DE -0.57%) hit an all-time high on May 16 after management reported second-quarter fiscal 2025 results (for the period ended April 27). Since then, the dividend stock has come down slightly from that high in lockstep with a broader market pullback.

But shares of Deere, which manufactures agricultural equipment and other heavy-duty machinery, are still up 235% during the past five years compared to a less than 100% gain in the S&P 500 (^GSPC 0.27%).

Buying stocks near all-time highs can seem counterintuitive. After all, everyone wants a good deal, which usually means paying less for something, not more.

But investing in shares of a company is different from buying a product or service. Companies with a clear runway for growing earnings and delivering on shareholder expectations can still be worth investing in. Here's why Deere fits that mold.

Image source: Getty Images.

Navigating a slowdown

For latest quarter, the company reported net income of $1.8 billion, which was down 24% from to the same quarter in 2024 and 37% lower than the comparable 2023 quarter. Falling earnings usually cause a stock sell-off, not new all-time highs. So investors may be wondering why the reaction to the latest results has been so positive.

Deere is a cyclical company whose earnings tend to ebb and flow based on various factors. When its end markets are thriving due to high crop prices, crop yields, or economic growth, then its customers may be more willing to boost their spending by expanding operations or upgrading their equipment. Management hopes that growth compounds over time so that each subsequent period of expansion is higher than the last, and each period of contraction isn't as bad. Deere's results reflect this pattern over time.

DE data by YCharts; TTM = trailing 12 months.

As you can see in the chart, earnings didn't just expand -- they exploded, more than tripling from pre-pandemic highs at the peak. Even after the pullback, Deere's trailing-12-month (TTM) earnings are still more than double pre-pandemic highs. And the stock price reflects that earnings growth.

In sum, the latest results only look bad compared to its comps from the last couple of years. The stock's valuation is still reasonable, with a 22.6 price-to-earnings (P/E) ratio.

A high-margin, balanced business

Deere updated its full-year fiscal 2025 net income projection from a range of $5 billion to $5.5 billion, to $4.75 billion to $5.5 billion. On its latest earnings call, management estimated that current tariff levels would have a $500 million pretax impact for fiscal 2025, which is likely the reason for the slightly lower forecast.

Investors may have been bracing for the results and forecast to be even worse, given the strength of its metrics in recent years, along with fears of slowing economic growth, trade tensions, and tariffs.

The following table shows Deere's second-quarter results by segment.

Data source: Deere.

All three segments tend to be high margin, but Construction & Forestry margins have taken a significant hit due to lower shipment volumes and prices. The largest segment by sales and operating income, Production & Precision Agriculture, is expected to experience a net sales decline of 15% to 20% for fiscal 2025, while Small Agriculture & Turf and Construction & Forestry net sales are expected to fall 10% to 15%.

Deere's industry outlook for fiscal 2025 calls for a 30% decline in large agriculture in the U.S. and Canada and a 10% to 15% decline in small agriculture and turf; Europe, South America, and Asia aren't expected to have nearly as large declines. So, given the slowdown in the broader industry, the results are understandable.

Even during a slowdown, it's still a high-margin business that generates plenty of free cash flow (FCF), which it uses to reinvest in its business, repurchase stock, and increase its dividend.

Driving shareholder value in multiple ways

Deere isn't a passive income powerhouse; it only yields 1.3%, which is about the same at the average stock in the S&P 500. But the company has no trouble paying the dividend and it pairs nicely with stock buybacks.

In December, Deere raised its dividend by 10.2% to $1.62 per share per quarter, giving it a forward dividend of $6.48 per share. The trailing-12-month FCF per share is $15.39 and its trailing-12-month earnings per share (EPS) is $22.56, giving the company a payout ratio of just 26%. Typically, investors will want to see cyclical companies have a payout ratio between 50% and 75%, but preferably closer to 50%. So Deere's payout ratio is very low, and it is generating plenty of FCF to cover its dividend.

The company has used excess FCF in recent years to rapidly repurchase stock and make sizable dividend raises. In just five years, its dividend has more than doubled, and its share count is down by more than 13%.

Significant reductions in share counts accelerate earnings growth. For example, if a company earned $100 in net income and had 100 shares, it would have $1 in EPS. But if it bought back 13 shares over five years -- the rough equivalent of Deere's buybacks -- then $100 in net income is now $1.15 in EPS because there are fewer shares with a claim on the earnings. It doesn't sound like much, but it makes a big difference when talking about companies earning billions in annual net income.

In this vein, Deere can boost EPS over time by increasing its net income and reducing its share count.

A coiled spring for economic growth

Deere hit an all-time high because it continues to execute on what it can control and generate strong results even as its key markets face significant declines. Its supply chain isn't immune to tariffs, but since it manufactures so much of its equipment in the U.S., it is relatively well insulated.

Deere remains a cash cow that can support its operating expenses, long-term investments, and capital return program with cash. All told, it checks all the boxes for a foundational stock to buy and hold over the long term.