Caterpillar (CAT) is the biggest and most famous construction and mining equipment company in the world. Caterpillar is a member of the Dow Jones Industrial Index, an index of 30 major US-based companies from different industries.

The Dow Jones index is not as diversified as the S&P 500 index, but for investors looking for low-risk investments into the biggest American companies, the Dow Jones can be worthy of a closer look.

Company Overview          

Caterpillar, which is valued at $80 billion, produces construction equipment as well as mining equipment. The company also has a smaller diesel & natural gas engine segment, an industrial gas turbines business, and a financing branch.

Caterpillar reported strong sales growth of 24% during its second quarter earnings release. This massive increase in Caterpillar’s revenues, coupled with strong operating leverage, allowed for earnings per share growth rate of 99% during Q2, as earnings rose to $2.97 per share during the quarter.

Growth Prospects      

The markets that Caterpillar sells to (construction & mining) are relatively cyclical, which makes Caterpillar’s business somewhat cyclical as well. Despite the fact that Caterpillar has generated solid earnings growth over long periods of time, results can see substantial swings both up and down on a year-over-year basis.

Both the construction as well as the mining industry are in a good position right now, as both benefit from strong economic growth around the globe. This has allowed Caterpillar to grow its revenues at a very compelling pace during the last couple of quarters.

Even though earnings growth will slow down over the coming years investors can still expect ongoing growth from Caterpillar in the future. Through some revenue growth and share repurchases, Caterpillar should easily be able to generate mid-single-digits earnings per share growth.

Valuation, Dividends, And Expected Returns

Caterpillar guides for earnings per share of $11.50 during 2018, which will not only be a new record profit but which also means that shares are quite inexpensive at the current price of $135.

With a valuation of slightly less than 12 times, this year’s earnings Caterpillar’s shares trade substantially below the long-term median earnings multiple of 15.5. Multiple normalizations will be a significant tailwind over the coming years, as shares are undervalued by ~25% right now.

Caterpillar currently offers a dividend yield of 2.6%. This yield is not overly high compared to what many traditional income stocks offer, but Caterpillar’s dividend yield still easily beats the broad market’s 1.8% yield.

Through a combination of earnings per share growth of ~6%, multiple expansion towards the historic median, which will result in a ~6% annual tailwind, and its dividend Caterpillar could produce annual total returns of 14%-15% over the coming five years.

Such a total return is highly attractive, especially when it comes from an inexpensive Dow Jones member that will continue to benefit from cyclical tailwinds.

Final Thoughts

The last couple of years have not been too easy for Caterpillar, but thanks to a very favorable macro environment and cost-cutting efforts the company will produce record profits during 2018.

Caterpillar should be able to grow its profits on a per-share basis beyond 2018 as well, and thanks to a low valuation, that allows for substantial multiple expansion, Caterpillar’s total return outlook is quite compelling.

This Dow Jones member is not a high-yielding income stock, but for those seeking share price gains or total returns, Caterpillar is worthy of a closer look.