Even though it fell 20% last year, I have high hopes for this dividend stock over the next 5 years

The industrial sector grew by 14% over the past year, slightly below the previous year’s results. S&P500but still a solid profit. Despite being an industry leader in heavy equipment for agriculture, construction and forestry, Deer (Germany 0.20%) The company’s shares have fallen 20% over the past year and remain at a three-year low.

Here’s why dividend stocks are selling out and why you should buy them and hold them for the next five years.

Cyclical Business Manual

When you think of Deere, you might think of landscaping, lawn and garden equipment. But the business is actually much more complex, encompassing tractors of varying horsepower, highly advanced commercial farming software and hardware, industrial engines, gas engines, forestry, construction, lawn and utility equipment and more.

Deere operates a global network of corporate offices, manufacturing, service centers, and dealer partnerships. In 2023, manufacturing and precision agriculture accounted for 45 percent of sales, construction and forestry 24 percent, and small agriculture and turf 23 percent. Most sales are business-to-business.

Deere’s business has many moving parts, making it very difficult to adjust to changes in the capital spending cycle. When interest rates are low, commodity prices are higher, and business is booming, Deere customers may expand operations or make capital investments in new equipment. But when borrowing costs are higher, commodity prices are falling, and business is slowing, customers may delay buying expensive items.

Changes in input costs such as fuel, chemicals, fertilizers and others also affect Deere’s business. Profitability in the construction segment can fluctuate based on trends in commercial and residential real estate.

The factors that affect a given end market vary, but in general all of Deere’s segments are susceptible to the capital expenditure cycle. Many variables beyond Deere’s control can have a major impact on its results.

To its credit, Deere has made efforts to reduce the cyclicality of its business through software offerings such as its cloud-based farm management system — John Deere Operations Center — that lets customers monitor, organize, analyze and share data. Its precision farming segment offers upgrade kits for existing equipment that can help increase yields, lower costs and more. These offerings can help boost sales without relying solely on buying new equipment.

But Deere’s results will continue to fluctuate with industry trends—at least in the short term. In the long term, Deere can differentiate itself from its competitors through innovation, competitive advantages such as a global supply chain and sales network, product improvements, acquisitions, pricing power and more.

Deere is a great value

Deere’s valuation is low, given its leading position in many industries on the global stage. The stock price has been low for years while earnings have risen — causing the price-to-earnings (P/E) ratio to fall to just 10.4. Even if Deere’s earnings fall 50% from its record year, the stock would still have a P/E of around 20.

In addition to its reasonable valuation, Deere consistently returns capital to shareholders through dividends and share repurchases. Over the past decade, Deere’s dividend has increased by 145%, while the number of shares outstanding has fallen by more than 20% due to repurchases. Deere yields just 1.7%, but its payout ratio is just 16%—meaning Deere spends just 16 cents of every dollar of earnings on dividends.

The low payout ratio suggests that Deere can raise its dividend faster than earnings without making expenses unmanageable. More importantly, it shows that dividends are affordable even when earnings are low. A payout ratio of 50% to 75% is generally considered healthy, and Deere would still have a payout ratio below 50 if earnings were just one-third of what they are now.

Take a Leap with Deere Stock

Deere ticks all the boxes when it comes to finding the best stock to buy and hold for years to come. It is a well-run, industry-leading company that invests capital well, benefits from economic growth and population expansion, operates in proven industries that are hard to disrupt, invests in technology improvements like automation and artificial intelligence, returns capital to shareholders through dividends and share repurchases, and has an inexpensive valuation.

With Deere’s earnings expected to decline this fiscal year and could fall even further next fiscal year, short-term investors may decide to pull the stock in pursuit of a hotter opportunity. But lasting stock market gains come from investing in a company at a good price and watching its value compound over time.

I can imagine Deere stock continuing to languish or even falling further until there is more certainty about the extent of the slowdown and how long it might last. However, trying to time the market perfectly could cause you to miss out on this great opportunity to buy Deere at a great price.