Caterpillar, Inc. (NYSE:CAT) was founded in 1925 and is headquartered in Peoria, IL. CAT manufactures construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. It provides technology for construction, transportation, mining, forestry, energy, logistics, electronics, financing and electric power generation.
CAT is a Dividend Contender with a track record of 21 consecutive years of dividend increases. It pays quarterly dividends of 70¢ per share in the months of February, May, August and November.
CAT is an existing holding. I first bought shares of CAT on 20 August 2013, picking up 30 shares at $83.73 per share and at an initial yield on cost (YoC) of 2.87%. This time, my initial YoC is 3.52%. The following chart shows these entry points:
With this buy, I’m averaging down to a per share price of $81.69. In the year-and-a-half that I’ve owned CAT, I’ve received $117 in dividends for a payback of 2.39%. Annualized total return is 5%.
Recent weakness in the share price of CAT is creating another good entry point for longterm investors. The yield, currently at 3.38%, is rising steadily.
CAT’s 10-year dividend growth rate is just above 10%, which is excellent considering the company’s dividend payout ratio history. Except for a spike in 2010, the payout ratio is below 50%:
The following chart shows CAT’s dividend payments and earnings per share over the last 10 years. The company’s dividends are growing steadily, but EPS is somewhat erratic. As with many other dividend growers, 2009 was a tough year:
It is interesting to see what an investment in CAT 10 years ago would have delivered. GuruFocus provides a suitable calculator. You would have more than doubled your money, receiving $17.39 in dividends per share (a 38% payback!) while YoC would now be 8.85%:
Analysis of CAT
My fair value estimate of CAT is $79.00, so I bought shares just above fair value. The following table provides some key statistics, with highlighted values relating directly to my selection criteria.
CAT passes the following of my selection criteria:
- A streak of at least 5 years of dividend increases (21 years)
- Dividend yield exceeds 2.75% (3.52%)
- Chowder rule: Dividend yield plus 5-year CAGR exceeds 8% (12.42%)
- Price to earnings ratio (P/E) is less than 20 (TTM 14.18x and Forward 12.60x)
- P/E to annual EPS growth (PEG) ratio is less than 2 (1.34)
- Reasonable confidence in continued dividend growth (Yes)
CAT fails the following of my selection criteria:
- Earnings per share (EPS) percentage payout is less than 40% (45.31%)
- Debt to equity ratio is below 50% (209%)
- 5-year CAGR is at least 10% (9.13%)
- Price discount is at least 5% of fair value estimate (-0.8%)
Based on these statistics, CAT earns 4 out of a possible 7 stars: (****–––)
Other ratings for CAT
CAT was ranked 7th in my January dashboard of dividend growth stocks. Since then, CAT reported 2014 earnings with earnings per share slightly better than in 2013, but an overall reduction in revenues of about 1%. The company has a gloomy outlook for 2015, expecting world economic growth to only improve modestly in 2015.
There are concerns about CAT’s direct exposure to oil, gas, mining, construction and emerging markets, which could negatively impact CAT’s revenue in 2015 and into 2016. Additionally, CAT’s international competitiveness could be impacted by the stronger dollar. As if these challenges are not enough, the company disclosed that it is being investigated by the SEC for moving cash among the company’s U.S. and overseas subsidiaries.
While CAT is facing some challenging headwinds in 2015, the company is focusing on managing costs through continued restructuring, operational improvements, and aggressive cost-cutting. These actions should position CAT for better results when the world economy improves and the oil price recovers.
The company has a strong balance sheet and paying and increasing dividends remain priorities. In 2014, CAT repurchased $4.2 billion of stock and raised the quarterly dividend by 17 percent despite weakness in revenue and earnings. The company has an impressive record of paying dividends in even the worst of economic conditions, so I’m confident that CAT would continue to do so. Having raised its dividend for 22 straight years, I believe CAT will continue to raise its dividend every year and become an S&P Dividend Aristocrat (25 consecutive years of dividend increases) in 2018.
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