Despite excellent results, this magnificent dividend stock is hovering around a two-year low. Here’s why it’s become too cheap to ignore.

Deere (OF 1.25%) the stock has been under pressure as the peak of the earnings boom appears to be over. However, the original equipment manufacturer for agriculture, construction and forestry is still delivering impeccable results that have far exceeded pre-pandemic levels.

Here’s why Deere is a great dividend stock to buy around its two-year low, even as the earnings growth clock ticks down going forward.

Image source: Getty Images.

Deere is coming off a historic boom

The best way to approach a cyclical company like Deere is to not get caught up in quarterly results and focus on the big picture. The best cyclical companies can capitalize on periods of expansion and minimize the effect of a slowdown. So instead of earnings booms and busts, the goal would be to get as close as possible to a “ladder” model — where each expansion period is better than the last and there are no significant declines in earnings in during the slowdowns.

Looking at Deere’s diluted earnings per share (EPS) over the past 20 years, we can see multi-year periods of growth and slowdowns. Notice how slowdowns often revert to the previous boom period.

Diluted EPS data (TTM) by YCharts.

Looking at the chart, you can also get an idea of ​​how extraordinary the recent period of expansion has been. Earnings have tripled from pre-pandemic levels, which is an unusually large increase in a relatively short period.

A slowdown was inevitable. When it reported its full-year 2023 results in November, Deere initially guided for fiscal 2024 net income of $7.75 billion to $8.25 billion — which would be around a 20 % to a record $10.166 billion in fiscal 2023.

But in its second-quarter 2024 earnings release, Deere updated its guidance to net income of $7 billion for the full fiscal year 2024, which is more like a 30% decline in just one year. Normally, this would be a pretty significant slowdown, but again, context is key. If it hits its target, Deere will return to fiscal 2022 earnings — which is still fantastic because it’s more than double what it earned before the pandemic in fiscal 2019. And it doesn’t look like fiscal 2019 has It’s been a terrible year for Deere. either. In fact, it was close to an all-time high in terms of profits.

Deere will see a substantial decline in earnings, but only relative to the huge gains of recent years.

Putting Deere’s assessment into context

Excluding more buybacks in fiscal 2024, Deere would have a price-to-earnings (P/E) ratio of 13.9 based on its market cap of $97.2 billion and net income of $7 billion in fiscal 2024. The P/E ratio is not a perfect measure of a cyclical company because of ebbs and flows in earnings. But overall, Deere should have updated its valuation relative to its historical average during boom times due to inflated earnings and a higher-than-historic P/E ratio during downturns due to lower earnings.

Looking at the median P/E of Deere stock at various intervals over the past 10 years, its current valuation would still to be below historical levels – making Deere underpriced even if its earnings were to fall 30% in a year.

DE PE report data by YCharts.

To get to that mid-cycle P/E ratio of about 17, Deere would need to post net income of about $5.7 billion — meaning earnings would have to decline nearly 20% in fiscal 2025 , in addition to the 30% decrease in fiscal year 2024.

The main takeaway is that Deere’s earnings would have to fall much further for the stock to be overpriced. And if Deere stops the bleeding after this year and returns to growth, it will look even cheaper.

Despite fluctuations in its earnings, Deere has kept its dividend flat or increased every year since 1988. The current quarterly dividend is $1.47 per share, more than double what Deere paid six years ago. Deere is also buying back a lot of its stock, reducing its share count and allowing EPS to grow faster than net income. Diluted EPS grew 285% over the past decade, compared to a 200% increase in net income, thanks to a 20% reduction in share count.

Deere is too good a company to be this cheap

Deere delivers excellent results from its operations while rewarding shareholders through buybacks and dividends. Deere’s rating is too cheap for its level of quality.

Investors are getting a great price for Deere stock even if its earnings continue to decline next fiscal year, making Deere stand out as a great dividend stock to buy now.