Investors looking for exposure to an emerging growth theme should consider agriculture stocks. The reason is simple - the global population is rising, and with it demand for food is climbing every year. And yet there remains a fixed amount of available farmland upon which people can grow food. Therefore, the world's agricultural producers face a significant challenge to meet the ever-increasing demand for food.
Investors can capitalize on this emerging trend by buying highly profitable and growing agriculture stocks. Deere & Company (DE) is a dominant industry leader with exposure to the agriculture industry. Deere will play a pivotal role in helping the world's farmers increase crop yields. The stock also has high appeal for dividend growth investors, with a dividend yield of 2.0% and increasing dividends on a regular basis.
Deere is one of the market's best plays on long-term growth due to rising global populations and demand for food.
Business Overview and Recent Events
Deere is the largest manufacturer of farm equipment in the world. The company also makes equipment used in construction, forestry and turf care. It also produces engines and provides financial solutions to its customers.
The current year has been challenging for Deere, which is not a surprise given the devastating impact of the coronavirus. On May 22nd, Deere reported fiscal second quarter 2020 results for the period ending May 3rd, 2020. For the quarter sales came in at $9.25 billion, representing an 18.4% decline compared to the same quarter last year. Results were down across the board due to the Covid-19 pandemic, with Equipment Operations, Agriculture & Turf, and Construction & Forestry down 20%, 18% and 25%, respectively.
Things were not much better on the bottom line. Net income equaled $665.8 million, down 41%, while earnings-per-share totaled $2.11 compared to $3.52 in the prior year's quarter. Investors should temper their expectations for the full year as well. Previously, Deere was anticipating net income of $2.7 billion to $3.1 billion for fiscal year 2020. However, this has since been reduced to $1.6 billion to $2 billion due to the ongoing pandemic. In addition, Deere expects sales for Agriculture & Turf to be down 10% to 15% and sales for Construction & Forestry to be down 30% to 40% this year.
Fortunately, the company is expected to remain strongly profitable this year, even with the coronavirus impacting its financial results. This will allow Deere to continue paying dividends to shareholders, and investing in future growth.
While there is little doubt the coronavirus will have a negative impact on the company's results this year, investors should be focused on the long-term outlook, which remains extremely positive for Deere. Put simply, Deere is at the center of a major trend - the rising global population, and consequently, rising demand for food.
Profit From a Major Global Trend
The global population, currently at 7 billion, is expected to rise to nearly 10 billion by 2050. This will naturally lead to increases in demand for food, a long-running trend. According to Deere's 2019 annual report, consumption of grains and oil seeds has increased without interruption for more than two decades. Population growth is typically accompanied by increasing consumption of meat as well, since rising standards of living and incomes results in more complex, protein-based diets. And, since there is only so much available farmland, this means food producers have to increase yields in order to meet the rising demand.
Separately, urbanization is an emerging trend that will benefit Deere. Globally, more people are living in cities, which has created greater demand for infrastructure such as roads, bridges, and buildings. Deere's construction equipment will help fill this need, which is increasingly important in fast-growing emerging markets around the world.
Deere has significant competitive advantages that will allow it to capitalize on the massive opportunity in front of it. Deere is the largest player in the agricultural machinery manufacturing industry. This means that it is hard for new competitors to steal market share from Deere, especially since it is difficult to replicate the company's global sales and dealership network. Deere has also been growing its presence in the higher-growth construction machinery market, both organically as well as through acquisitions.
For example, the 2017 acquisition of Wirtgen Group expanded its presence in the construction machinery industry. With a wider presence in this industry Deere could be benefit from construction activity in markets such as the U.S. and China over the long-term. Helped in part by the Wirtgen acquisitions, Deere's construction and forestry sales increased by 10% last year, while operating profit rose 40%, surpassing $1 billion for the first time.
Meanwhile, Deere is a very shareholder-friendly company that returns a great deal of cash to investors. Last year, Deere returned nearly $2.2 billion to shareholders through dividends and share buybacks. The company raised its dividend by 10% in 2019, the eighth dividend increase in the past 10 years.
The global population continues to rise and with it demand for food is increasing. With a finite amount of available farmland for food production, the world's food producers will need to maximize crop yields to solve this emerging challenge. This is where Deere comes in - it is a global leader in agricultural machinery with a dominant global position. It is optimally positioned to capitalize on rising demand for food. Deere has a solid 2.0% dividend yield, along with long-term growth potential. This makes it a highly appealing stock for income investors in search of a mix of dividends and growth.