Whitworth Said to Almost Double Deere Stake, May Push for Bigger Dividend
Ralph Whitworth, the activist investor who pushed Home Depot Inc. to sell assets and undertake a $22.5 billion stock-buyback program, is setting his sights on Deere & Co., said a person with knowledge of the matter.
Relational Investors LLC, cofounded by Whitworth and David Batchelder, may lobby the biggest farm-equipment maker to raise its dividend or resume stock repurchases, said the person, who asked not to be identified because the firm hasn’t disclosed its plans. Relational, based in San Diego, has almost doubled its Deere stake to 1.2 percent of shares outstanding since March 31, the person said.
Deere said May 19 that earnings in the second quarter ended April 30 rose 16 percent, helped by the U.S. economy’s recovery, and raised its profit and sales forecasts for the second time this year. Relational may have difficulty gaining support from other shareholders, said analyst Stephen Volkmann of Jefferies & Co., because investors already give the Moline, Illinois-based company top marks for investing capital efficiently.
“This is a bit of a head-scratcher, other than somebody drooling over their cash,” said Volkmann, who is based in New York. “You could argue that the balance sheet is cash-heavy and could be used for something else, like a big share repurchase.”
Seeking a Meeting
Relational’s principals plan to meet with Deere management to discuss the best use of future profits, according to the person familiar with the firm’s plans. Kenneth Golden, a Deere spokesman, declined to comment, saying the company doesn’t discuss its shareholders; Sandi Christian, Relational’s director of marketing, said Whitworth wasn’t immediately available.
Deere’s net debt is essentially zero, according to Volkmann, who recommends buying the stock and currently holds no shares. The optimal debt level for most industrial companies is 30 percent of capitalization, Volkmann added.
Deere began stockpiling cash during the 2008 credit crunch, forgoing dividend increases and halting its share-buyback program. Management wanted to build enough reserves to repay any debt coming due over the ensuing 12 months at its credit unit, which finances customer equipment purchases, Volkmann said.
The company’s cash and easy-to-sell securities fell to $3.8 billion in the quarter ended April 30 from $5.2 billion three months earlier, as Deere used funds to repay debt.
James Field, Deere’s chief financial officer, said during a May 19 conference call with investors that the primary goal of Deere’s cash policy is to maintain the company’s “A” credit rating and make adequate reinvestments to maintain its competitive edge. Once these priorities are satisfied, Field said, the company will look at “modestly increasing” its dividend and explore repurchases “from time to time.”
Relational held 2.74 million shares with a market value of almost $163 million as of March 31, according to documents the firm filed this month with the U.S. Securities and Exchange Commission. The firm has almost doubled its stake to 5 million shares since then, according to the person familiar with the move.
Deere’s largest institutional shareholder is Wellington Management Co., a Boston-based mutual fund company that held 16.5 million company shares at March 31, according to data compiled by Bloomberg. Capital World Investors, a Los Angeles- based adviser to the American Funds, was second with 16.4 million shares.
Relational, which oversees about $6.5 billion in assets, previously sought to influence the use of capital at holdings including Home Depot, the world’s largest home-improvement retailer. After Relational threatened to start a proxy fight for board seats, the Atlanta-based company appointed Batchelder as a director in February 2007, sold its contractor-supplies unit six months later for $8.5 billion and used the proceeds to help fund a $22.5 billion stock-repurchase plan.
The money management firm, founded in 1996 by Whitworth and Batchelder after they worked for billionaire oilman T. Boone Pickens, has beaten the S&P 500 Index by nine percentage points on an annualized basis since inception, the person familiar with Relational said. The firm’s investments were hurt by the 2008 stock-market decline.
Investing in Relational’s five largest holdings as reported in quarterly portfolio filings with the SEC would have produced a 30 percent loss over the past three years, according to AlphaClone LLC of San Francisco. That equals an annualized loss of 11 percent, according to the research firm, which tracks the performance of 300 institutional money managers through their regulatory filings.
Whitworth concluded that Deere has made poor use of profits in some instances, leading to a lower stock-market valuation, said the person with knowledge of his plan. The stock has gained 7.8 percent this year, giving it a market capitalization of $24.8 billion, compared with the decline of 2.8 percent by the Standard & Poor’s 500 Index.
In the quarter ended Oct. 31, Deere booked a $274 million after-tax writedown of the value of a landscaping unit. In February, Deere said it would review options for a wind-energy unit it has spent $1 billion developing in the past five years.
Relational wants Deere to examine whether profits would be better invested in its core manufacturing operations or returned to stockholders through buybacks and increased dividends, the person said.
Deere bought back almost $3.2 billion of stock during fiscal 2007 and 2008 before halting the repurchases last year, when management decided to amass cash. As of Jan. 31, Deere had authorization to buy back 114 million shares, according to its most recent quarterly report.
Deere’s dividend yield is 1.91 percent, compared with a combined 2.0 percent for stocks in the Standard & Poor’s 500 Index. Caterpillar Inc., the Peoria, Illinois-based manufacturer of construction equipment that competes with Deere, pays a dividend yielding about 2.79 percent.
Whitworth and Batchelder founded Relational in 1996 with an initial allocation of $200 million from the California Public Employees’ Retirement System, the nation’s largest public pension fund. Calpers now has $1.5 billion invested with Relational.