Caterpillar Inc. (CAT) is a global leader in constructing heavy machinery, inventing power solutions, and producing locomotives. In fact, the company is the biggest player in the heavy equipment space on Earth, with a prevailing market share in the construction and mining machinery industry.
Caterpillar’s operations expand across multiple sub-branches. However, for simplicity, they can be divided into four divisions: Construction, Resource, Energy and Transportation, and Financial Services.
In my view, due to Caterpillar’s key position in the space, the company is well-positioned to absorb the upcoming benefits from the $1 trillion infrastructure bill approved last November. Its financials are already moving in the right direction. I am bullish on the stock.
Improving Results & the Dividend
Caterpillar’s Q3 results illustrate that the company is already moving in the right direction, with revenues growing 25% to $12.4 billion compared to $9.9 billion achieved in Q3 2020. Growth was driven by elevated sales volume and increased pricing power.
Specifically, the company’s Construction, Resource, and Energy & Transportation segments grew by 30%, 32%, and 22%, respectively. Adjusted EPS came in $2.66 compared to $1.52 last year.
During the quarter, the company repurchased $1.4 billion of common stock and paid dividends of $0.6 billion. In fact, considering the company’s double-digit growth and ongoing tailwinds in the space, I wouldn’t be surprised to see a re-acceleration in dividend growth. After all, dividend hikes have been quite reassuring lately, with the latest two hiking DPS by 19.8% and 7.8%, respectively.
The ongoing $4.44 annual payout rate suggests a payout ratio of 43.5% against analysts’ estimates of EPS of $10.36 for the year. Additionally, analysts expect EPS growth of around 19% and 23% in the following two years, respectively, probably to be powered by the infrastructure bill’s assistance.
Therefore, Caterpillar is likely to keep rewarding shareholders nicely in terms of its future dividend growth.
Is the Stock Fairly Valued?
Caterpillar’s forward P/E ratio currently stands at 21.5 times based on analyst estimates and the stock’s current price.
From one point of view, this is surely a steeper multiple than the one the stock was trading during 2018-2020, and it also signifies a premium versus the stock’s historical average. However, assuming the company achieves the double-digit EPS growth forecasted in the next two years, the 21.4 multiple is not that expensive. From that standpoint, the stock is trading at 14.6 times its expected Fiscal 2023 net income, which again suggests that the stock is reasonably priced.
Also, considering that shares currently yielding close to ~2%, with tempting dividend growth prospects going forward, dividend growth investors could be attracted to Caterpillar’s investment case in the current ultra-low rate environment.
Wall Street’s Take
Turning to Wall Street, Caterpillar has a Strong Buy consensus rating, based on seven Buys, two Holds, and one Sell assigned in the past three months. At $234.70, the average Caterpillar stock forecast implies 5.2% upside potential.
Conclusion
Backed by strong tailwinds in the industry, Caterpillar’s financials have been improving lately. While the stock’s valuation multiple may seem slightly expanded, considering the company’s prospects going forward, Caterpillar could be a reasonably valued dividend growth pick at the moment.
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