What John Deere’s Fiscal Conservatism Means for Investors

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Recently, John Deere (NYSE:DE) declared its quarterly dividend of $0.51/share. What was somewhat unusual is that the company was scheduled to raise its dividend as so many blue chip companies do on an annual basis. Deere didn’t. Nevertheless, since this decision was made, the shares are up from below $85/share to above $88/share on above average volume, and so it seems that investors are applauding this move. What does it mean for shareholders both in the short and long term?

Materially, it makes very little difference. A $0.05/share dividend raise (9.8 percent) per quarter would mean an additional expenditure of about $75 million. This isn’t much considering that the company had well over $3 billion in profits over the past 12 months. It does, however, speak to management’s priorities and to its agenda and outlook.

As we saw in the company’s latest earnings release, management’s outlook is relatively cautious. It expects that sales in its agriculture division will be slightly down year-over-year given that the prices of agricultural commodities are down. This latter fact implies that farmers will have less capital available to upgrade their equipment, and so there is nothing surprising about this negativity. Furthermore, even though the prices of agricultural commodities have begun to rise this will likely not impact farmers’ decisions for the upcoming planting season unless we see an unusually large price spike.

In addition to this conservative outlook, investors need to realize that Deere is a highly leveraged company with $34 billion in debt and a debt/equity ratio of 3.6. As a non-financial company this is high, and it borders on excessive. If Deere’s business performs well then it will pay off, but if we see a recession and/or lower agricultural commodity prices Deere shares are particularly vulnerable, and in a panic it may be forced into a panic selling scenario that would be horrific for shareholders.

While this isn’t the most likely scenario by any means, it is a worst-case scenario, and I think Deere’s management — with its conservative outlook — wants to strengthen its capital position. While this is a good thing, I think it ultimately sheds light on Deere’s relatively precarious financial position.

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