Dividend Aristocrats In Focus: Caterpillar

One of the newest members of the Dividend Aristocrats list is industrial heavy equipment supplier Caterpillar Inc. (CAT).

Caterpillar made the 2019 Dividend Aristocrats list by raising its dividend for the 25th year in a row. Even more impressive is the fact that Caterpillar operates in a cyclical industry. However, Caterpillar management has proven its commitment to returning cash to shareholders even though the inevitable ebbs and flows of the business.

Some recent weakness in the share price has led the yield back up to 2.8%, making Caterpillar not only a long-term dividend growth story, but one that offers strong current income as well.

Caterpillar’s 2.8% current yield and the potential for 10%+ annual dividend increases for many years to come to make the stock attractive for long-term dividend growth investors.

Business Overview

Caterpillar was founded in 1925, and today competes in the manufacturing and selling of construction and mining heavy equipment. The company also manufactures ancillary industrial products such as diesel engines and gas turbines. Caterpillar generates annual revenue of $58 billion and the stock has a market capitalization of $77 billion, making it one of the largest industrial stocks.

Industrial stocks have struggled in the recent past as fears over slowing – or even declining – global economic growth have compressed valuation multiples in the industry. Caterpillar is particularly beholden to commodity prices of all sorts, from metals to crops, so this fear has hit the share price significantly in the past couple of years. However, we see shares as quite meaningfully undervalued at current prices even if some of these fears over growth and commodity prices come to fruition.

Caterpillar reported fourth-quarter earnings on 1/28/19 and the results were strong. Revenue was up 11% during Q4 to $14.3 billion, as the company saw each of its major segments grow revenue at sizable rates. The construction segment produced an 8% increase in revenue while the resource segment rose 21%, and energy and transportation saw an 11% rise in the top line.

The company’s financial services business was a small drag on Q4 results with its 4% revenue increase, but overall, Q4 was tremendous from a revenue perspective.

Source: Q4 earnings presentation, page 11

For the full year, results were even better as the top line rose 20% and adjusted earnings-per-share soared 63%. That earnings-per-share growth to $11.22 was good enough to be a new record for Caterpillar, which is hardly what one would expect based upon the way the share price has behaved recently.

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Disclaimer: Sure Dividend is published as an information service. It includes opinions as to buying, selling and holding various stocks and other securities. However, the publishers of Sure ...

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