Deere & Company (NYSE:DE) stock is down almost 16% since last August, when the farm equipment and machinery maker revised downward its full-year guidance, which was lower than analysts’ expectations. But in classic Warren Buffett fashion, that hasn’t stopped the multibillionaire investor from increasing his holdings in DE stock.
Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A) purchased about 5.7 million shares of DE stock in the fourth quarter of 2015, bringing its total stake in Deere & Company to 22.8 million shares. That accounts for about 7.2% of the company, worth about $1.7 billion as of December 31, 2015. (Source: “Deere Lowers 2016 Forecast, Warren Buffett Increases Stake,” Fortune, February 19, 2016.)
Buffett loves to buy undervalued businesses and hold them for the long-term. He is arguably the most successful investor of all time.
So what does Buffett see in Deere? Let’s take a look at why he might be buying DE stock.
DE Stock Is Down
Buffett has been quoted as saying, “Be fearful when others are greedy, and be greedy when others are fearful.” The latter half of that quote definitely applies to Deere stock.
In its most recent quarter, Deere announced that revenue fell 13% to $5.525 billion over last year and that net income fell by about 34%. (Source: “Deere Announces First-Quarter Earnings of $254 Million,” Deere & Company, March 3, 2016.)
Deere attributed the sales and earnings decline to the downturn in the global farm economy and to the general weakness in construction equipment markets. For 2016, the company is forecasting a decline of 10%.
Low bumper corn crops in particular are largely to blame, leaving Deere’s customers with less income to purchase expensive farming equipment.
As prices for corn, soybeans, and other commodities rose over the last decade, farmers ploughed their extra income into new farm equipment, such as tractors and combines. Industry sales peaked in 2013, after which prices retreated, leading to a fall of more than 60% in sales of large agricultural equipment in the U.S. Deere’s total equipment sales have dropped about 25% from their highs. (Source: “Annual Report 2015,” Deere & Company; https://s2.q4cdn.com/329009547/files/doc_financials/annual_reports/2015/2015_John-Deere-Annual-Report.pdf, last accessed March 15, 2016.)
Despite the sour news, CEO Samuel Allen insists that the current decline represents a level of performance that is much better than previous farming downturns.
With the investing community fearful of DE stock, Buffett is buying.
Buffett coined the phrase “economic moat,” which refers to a business’ ability to maintain competitive advantages over its competitors so that it can protect its profits and market share from rivals.
Deere & Company is an American icon known for its high-quality products. The company was founded in 1837 and was the world’s 70th most powerful brand in 2015, according to Forbes.
Deere dominates the U.S. and Canada’s $23.0-billion farming equipment market with a 60% share. (Source: “Deere’s Big Green Profit Machine,” Bloomberg, July 5, 2012; http://www.bloomberg.com/news/articles/2012-07-05/deeres-big-green-profit-machine.) Deere’s strategy is to sell its machines with dealers who work so closely with farmers that they practically become partners. This locks in customers over several generations, essentially creating a network effect.
Add to that Deere’s strong brand name, which gives customers confidence that the equipment and machinery they buy will last longer than comparable products.
Lastly, Deere prefers to develop its products internally, rather than acquiring other companies. This is another way the company differentiates itself from its competitors. As such, in December 2012, Deere was named as a top 100 global innovator by Thomson Reuters. (Source: “Thomson Reuters Names the World’s Top 100 Most Innovative Companies,” Denso Dynamics, December 4, 2012; http://www.densodynamics.com/thomson-reuters-names-the-worlds-top-100-most-innovative-companies/.)
Buffett loves to buy stock of companies that pay out dividends to shareholders. In fact, most of his portfolio is comprised of dividend stocks—a whopping 92.5%. (Source: “Warren Buffett’s Top 20 Dividend Stocks with the Highest Yields,” SureDividend.com; http://www.suredividend.com/warren-buffett-20-high-yield-dividend-stocks/, last accessed March 15, 2016.)
DE stock has been paying out dividends to shareholders since 1971 and has increased its dividend every year since 2003, from $0.40 a share to $2.40 a share. That’s a compound annual growth rate of 16.1%, which is very attractive for income investors.
Lastly, at its current price, DE stock has a dividend yield of 2.9%.
The Bottom Line on DE Stock
You can’t argue with the investing master. Buffett obviously sees something in Deere & Company that will reward him as a shareholder for years to come. I’ve identified three possibilities based on Buffett’s investing criteria. With the company’s stock down, its economic moat, and dividend payouts, investors may want to take a cue from Warren Buffett and take a closer look at DE stock.