Deere (EN 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 far exceed pre-pandemic levels.

For this reason, Deere is a great dividend stock to buy near its two-year low, even if earnings growth is slower in the future.

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Deere is experiencing a historic boom

The best approach for a cyclical company like Deere is to avoid getting caught up in quarterly results and focus on the bigger picture. The best cyclical companies can take advantage of periods of expansion and minimize the impact of an economic slowdown. Rather than booms and busts in earnings, the goal would be to get as close to a “staircase” pattern as possible – where each period of expansion is better than the one before and there are no significant declines in earnings during economic downturns.

Looking at Deere’s diluted earnings per share (EPS) over the past 20 years, you can see multi-year growth phases and downturns. Note that the downturns often stem from the previous expansion phase.

Diluted DE EPS data (TTM) from YCharts.

A look at the chart also highlights how extraordinary the recent expansion phase has been. Revenues have more than tripled from pre-pandemic levels, representing unusually high growth in a relatively short period of time.

A slowdown was inevitable. When Deere reported its full-year 2023 results in November, the company initially forecast net income of $7.75 billion to $8.25 billion for fiscal 2024 – down about 20% from the record $10.166 billion in fiscal 2023.

Yet in its second-quarter 2024 earnings release, Deere updated its full-year 2024 net income forecast to $7 billion, more like a 30% decline in just one year. Normally, that would be a pretty significant slowdown, but again, context is key. If the target is met, Deere will be back to fiscal 2022 profit levels—which is still fantastic, because it’s more than double the pre-pandemic profit it achieved in fiscal 2019. And it’s not like fiscal 2019 was a terrible year for Deere, either. In fact, it was close to a record high in terms of profit.

Deere is expected to see a significant decline in profits, but only compared to the above-average growth of recent years.

The evaluation of Deere in context

Without further 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 for a cyclical company due to the volatility in earnings. But in general, Deere should have had a lower valuation during expansion periods due to outsized earnings and a higher P/E during downturns due to lower earnings relative to its historical average.

Looking at the average P/E ratio of Deere shares at different intervals over the last 10 years, the current valuation would be Despite it below historical levels – which would make Deere undervalued even though its profit would decline by 30% within a year.

DE-PE ratio data from YCharts.

To achieve that P/E ratio of about 17 at mid-cycle, Deere would need to generate net income of about $5.7 billion. That means earnings would have to decline nearly 20% in fiscal 2025, in addition to the 30% decline in fiscal 2024.

The key takeaway is that Deere’s earnings would have to fall much more for the stock to be overpriced. And if Deere stops the bleeding after this year and starts growing again, the company will look even cheaper.

Despite the earnings fluctuations, Deere has kept its dividend constant or increased it every year since 1988. The current quarterly dividend is $1.47 per share, more than double the dividend Deere paid six years ago. Deere also buys back many of its shares, reducing the share count and causing earnings per share to grow faster than net income. Diluted earnings per share have increased 285% over the past decade, compared to a 200% increase in net income, driven by a 20% reduction in the share count.

Deere is too good a company to be so cheap

Deere generates excellent financial results and rewards its shareholders through share buybacks and dividends. Deere’s valuation is too low relative to its quality.

Even if the company’s earnings continue to decline next fiscal year, investors are getting an excellent price for Deere stock, making Deere a great dividend stock to buy now.