Published by Bob Ciura on June 24th, 2017
The past few years have been tumultuous for farm and construction stocks. The downturn in commodities prices, such as oil, gas, and crops, have put a huge dent in demand.
As commodity prices plunged, customers of these businesses have cut back on capital spending, particularly when it comes to heavy machinery and equipment.
Some farm and construction stocks have fared better than others, but there is still plenty of value left among these stocks.
And, many farm and construction equipment companies have remained highly profitable, even during the downturn, which has allowed them to pay dividends—and even raise them.
This article will discuss the top five farm and construction equipment stocks for dividend investors.
Farm & Construction Dividend Stock #1: Caterpillar (CAT)
Dividend Yield: 3%
Caterpillar manufactures Earth-moving machinery. It has struggled over the past year, due to the downturn in commodity and precious metals prices.
The stock has a solid 3% dividend yield, and a long history of dividend growth.
Caterpillar is a Dividend Achiever, a group of stocks with 10+ years of consecutive dividend growth.
This has been a huge challenge for Caterpillar, as the energy and mining industries comprise a large portion of its customers.
This caused Caterpillar’s total sales to decline 18% in 2016. Sales have declined 30% in the past three years.
Source: Deutsche Bank Global Industrials & Materials Presentation, page 4
Conditions were worst in the emerging markets—Caterpillar’s sales fell by 30% in Africa and the Middle East, and by 19% in Latin America.
The company swung to a $67 million net loss last year, which completely wiped out a $2.5 billion profit in 2015.
However, Caterpillar stock has been surprisingly resilient—shares have risen 36% in the past year, and 12% year-to-date.
One reason for this is that investors are anticipating conditions to improve going forward.
First, a large portion of Caterpillar’s net loss in 2016, was due to restructuring expense and other non-recurring factors.
Restructuring came at a large short-term cost to the company, but the long-term benefits are clear. Caterpillar’s costs were reduced by approximately $2.3 billion last year.
Operating results are not as bad as the GAAP figures suggest. On an adjusted basis, Caterpillar reported earnings-per-share of $3.42 last year, but still down from $5.35 in the previous year.
Next, sales in China continue to grow. Sales in Asia rose 12%, while Latin America saw a notable recovery, with 14% sales growth.
And, Caterpillar’s large Resource Industries segment is showing signs of improvement.
Source: Deutsche Bank Global Industrials & Materials Presentation, page 8
This business was hit hard by the commodities downturn—since 2014, Resource Industries segment sales declined 37%.
However, in the first quarter, Resource Industries segment sales rose 15%, thanks to strong demand for aftermarket parts.
Total revenue increased 3.8%, year over year. Earnings-per-share, as adjusted, doubled from the same quarter last year.
Caterpillar expects 2017 to be a much better year than 2016. Sales are expected to increase to $38 billion to $41 billion for the full year, which would represent as much as 6.5% growth from 2016.
Adjusted earnings-per-share are expected at $3.75, which would be a huge improvement from last year.
This should be more than enough for Caterpillar to sustain its dividend, and continue to grow the dividend each year.
Farm & Construction Dividend Stock #2: Deere & Company (DE)
Dividend Yield: 2%
Up next is Deere & Company, another giant in the heavy machinery business.
The difference between Caterpillar and Deere is that, while Caterpillar’s machinery caters to the energy and mining industries, Deere’s equipment is focused on agriculture.
What Caterpillar and Deere have in common, is that they are both working through difficult operating conditions.
Deere manufactures farming equipment like tractors and combines.
Prices of agriculture commodities, such as corn, cotton, and wheat, are at their lowest level since 2008.
This has suppressed farm incomes in the U.S. and abroad, which has resulted in much lower demand for Deere’s tractors and combines.
The downturn in the agriculture industry has weighed on Deere’s core Agriculture & Turf operating segment.
Source: May 2017 Investor Presentation, page 15
For example, in 2016 Deere’s net sales declined by 8%, while earnings-per-share fell by 17% for the year.
In response, Deere is employing cost controls, and conditions are already starting to improve.
Over the first two quarters of the current fiscal year, net sales rose 4%. Earnings-per-share increased 31% in that period.
Deere expects full-year sales to increase 9% from 2016.
While Deere has not raised its dividend since 2014, its current dividend appears to be highly secure.
Even in a challenging climate last year, Deere still generated earnings-per-share of $4.81 in 2016. This was more than double its dividends paid, of $2.40 per share.
Deere’s strong brand gives the company pricing power, which allows it to remain steadily profitable.
It has continued to generate strong cash flow, even while its operating industry has deteriorated.
Deere generated $2.8 billion of net cash flow in 2016.
Source: May 2017 Investor Presentation, page 8
Another growth catalyst for Deere is the recently-announced $5 billion acquisition of the Wirtgen Group, which manufactures equipment for road construction.
The deal gives Deere additional diversification, both in terms of product offerings, as well as geographic expansion.
There is no product overlap between the two companies. Deere gains a presence in road construction and transportation projects, both of which tend to be less cyclical than agriculture.
Plus, Wirtgen is based in Germany, and sells its products in more than 100 countries around the world. It furthers Deere’s growth in the emerging markets.
In the middle of an industry turnaround, and with a large acquisition in the works, Deere’s near-term dividend growth potential is muted.
But, if the turnaround continues over the back half of the year, there is a good chance the company can raise the dividend next year.
Farm & Construction Dividend Stock #3: CNH Industrial (CNHI)
Dividend Yield: 1.1%
CNH is based in the U.K. It is a manufacturer of a wide range of industrial machinery, including tractors and agricultural machinery, and earth-moving equipment.
It also manufactures vehicles for commercial, construction, and firefighting purposes, as well as buses and coaches.
Lastly, CNH also manufactures engines and transmissions.
CNH is a large player in the industry. It has a market capitalization of $15.5 billion.
The company’s segment breakdown is as follows:
- Agriculture Equipment (39% of 2016 sales)
- Commercial Vehicles (37% of 2016 sales)
- Powertrain (15% of 2016 sales)
- Construction Equipment (9% of 2016 sales)
2016 was a difficult year for CNH. This is not surprising, as lower commodity prices and economic growth in the emerging markets suppressed demand for industrial machinery.
Sales from core industrial activities fell 4.1% for the year, although excluding currency translations, sales only declined 2.9%.
CNH reported a net loss of $249 million in 2016, due to a continued restructuring. However, this was a much better performance than in 2015, when CNH lost $497 million.
The ongoing restructuring will cost the company an additional $100 million in 2017, but going forward, CNH forecasts cost synergies of $80 million per year, starting next year.
The company is taking aggressive action to cut capital expenditures and lower spending, to help restore profitability.
Source: Q4 Investor Presentation, page 10
The company will also benefit from an improving balance sheet.
As a reflection of its improved financial position, on June 16th, Standard & Poor’s raised CNH’s credit rating from ‘BB+’ to ‘BBB-‘.
This is an important milestone, as it elevates CNH to an investment-grade credit rating, which will help lower the company’s cost of capital.
With a lower cost of capital, the company will spend less on interest expense, which could leave more cash flow left over for growth investment, or raising the dividend.
Conditions have already started to improve in 2017.
In the first quarter, the company earned a net profit of $49 million. In the same quarter last year, the company lost $513 million.
Farm & Construction Dividend Stock #4: Lindsay Corp (LNN)
Dividend Yield: 1.4%
Lindsay is an industrial manufacturer. It produces a range of equipment including farm and construction machinery, road and railroad equipment, and water pumps.
In the agriculture industry, Lindsay’s products work primarily in irrigation, and help stabilize or increase crop yields.
The company also manufactures products that are put to work in new infrastructure projects, primarily in road construction.
Source: May 2017 Investor Presentation, page 4
The core of the business is in irrigation, which means Lindsay is hurting from many of the same factors as Deere.
Namely, lower commodity prices have caused farm incomes to decline, which has restrained demand for irrigation systems.
This is why Lindsay’s total revenue declined by 8% in fiscal 2016. Fiscal 2017 is not expected to be much better—Lindsay management forecasts a record fall harvest for corn and soybeans.
Such strong crop production is likely to continue to put downward pressure on commodity prices.
Fortunately, Lindsay’s international segment is performing better-than-expected to start fiscal 2017. Revenue over the first half of the fiscal year declined 3%.
That said, the company’s cost reductions led to 60% growth in operating profit over the first half.
While the past few years have been difficult for its irrigation systems segment, it has generated strong growth over a long period.
Source: May 2017 Investor Presentation, page 11
The long-term growth catalysts for irrigation are still intact.
First, Lindsay expects the global population will rise by 2 billion by 2050. This will put an enormous strain on global food production, as well as on efficient water use.
In addition to rising populations, there will be a continued need for improved water purity.
As a result, Lindsay stands to benefit from higher demand moving forward.
In the meantime, the company should be able to remain profitable, and the dividend appears to be sustainable.
Farm & Construction Dividend Stock #5: Vulcan Materials (VMC)
Dividend Yield: 0.8%
Last but not least is Vulcan Materials, the largest U.S. manufacturer of construction ‘aggregates’. These are products such as crushed stone, sand, and gravel.
It also produces asphalt and ready-mix concrete.
Vulcan is an industry-leader—it has more than 300 aggregates production sites, along with 100 asphalt and concrete production sites.
Vulcan is a strong company. In 2016, Vulcan’s revenue increased 5%, and gross profit increased 17%.
Conditions have remained strong this year—first-quarter revenue and net profit increased 2% and 12%, respectively.
Over the remainder of 2017, the company forecasts aggregates shipments to rise as much as 8% from last year, which indicates strong demand. Prices are expected to increase as much as 7% this year.
As a result, Vulcan stands to benefit greatly from improved construction spending.
For example, while demand continues to grow, Vulcan estimates demand is still well below peak levels, in many of its core markets.
Source: 2016 Annual Report, page 6
Vulcan serves 19 of the 25 fastest-growing regional markets in the U.S.
As a result, there is a great deal of growth potential, particularly if domestic infrastructure spending increases.
The company sees the potential for several years of 10%+ annual revenue growth moving forward. This growth will be due to a combination of higher pricing and volumes.
Vulcan would benefit from stronger demand from both the private and public sectors. A few potential catalysts include population growth, rising employment, and continued increases in transportation funding.
Vulcan plans to accelerate this growth with acquisitions.
For example, on May 25th the company announced it will acquire an aggregates business, Aggregates USA, for $900 million in cash.
Aggregates USA operates 31 facilities in the U.S., and gives Vulcan growth opportunities from continued increases in state highway funding programs in the southeastern U.S.
Vulcan expects the deal to be accretive to earnings in the first year after closing.
While Vulcan has a low dividend yield, at less than half the average yield of the S&P 500 Index, it makes up for this with high dividend growth rates.
For example, on February 10th Vulcan raised its dividend by 25%.
This kind of dividend growth could elevate Vulcan’s dividend in a short time.
For example, a 25% compound annual dividend growth rate would effectively double investor’s dividend income in just over three years.
The five stocks presented on this list are all dividend payers, many of which have grown their dividends at high rates.
Some are struggling right now, due in large part to declining commodity prices. However, the long-term growth potential for agriculture and construction remain strong.
From this list, Caterpillar and Deere appear to be the most attractive stocks, based on their strong brands, higher dividend yields, and industry leadership positions.