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Caterpillar Stock: A Rock-Solid Dividend Growth Pick
Stock Analysis & Ideas

Caterpillar Stock: A Rock-Solid Dividend Growth Pick

Caterpillar Inc. (CAT) is a leader in manufacturing heavy machinery, inventing power solutions, and producing locomotives. In fact, the company is the world’s largest player in the heavy equipment space, with a dominant market share in the construction and mining machinery industry.

Caterpillar’s operations take many forms. However, for convenience, they can be segmented into four divisions: Construction, Resource, Energy and Transportation, and Financial Services.

The company sells its equipment through an extended dealer network all over the world, 45 of which are located in the United States, with 116 located internationally, serving 192 countries.

Due to Caterpillar’s unparalleled expertise amongst its industrial peers, the company is certainty well-positioned to benefit from the recently approved $1-trillion infrastructure bill. I am bullish on the stock. (See CAT stock charts on TipRanks)

Robust Financials Sustaining Growing Capital Returns

The recently approved infrastructure bill is going increase spending on construction machinery, which should increase the revenues of Caterpillar as it is the largest player in this field. However, the company has been producing robust results for decades, regardless of such one-off boosts.

Industrial spending can be cyclical, resulting in fluctuating revenues over time. Following the Great Financial Crisis, for example, Caterpillar’s revenues were materially impacted.

However, due to the company’s diversified cash flows and smart asset management (e.g., long-term equipment leasing, machinery financing, etc.), operating cash flows have remained stable. Specifically, Caterpillar has not posted negative operating cash flows for over 16 years.

This is evident in Caterpillar’s capital returns, which management has preserved even in the toughest of situations. Caterpillar has hiked its dividend annually for 27 sequential years, which places it in the S&P500 Dividend Aristocrats index.

This is quite impressive considering its volatile industry of operations. Dividend hikes have also been very confident lately, with the latest two raising DPS by 19.8% and 7.8%, respectively.

The current $4.44 annual payout rate implies a payout ratio of 43.5% against analysts’ estimates of EPS of $10.20 for the year. Further, analysts expect EPS growth of around 22% and 15% in the following two years, respectively, likely to be powered by the infrastructure bill’s assistance.

Hence, Caterpillar is likely to continue to reward shareholders richly in terms of its future dividend growth. 

The Valuation

Caterpillar is currently trading at around 19 times next year’s net income.

On the one hand, this is certainly a more expensive multiple than the one the stock was trading a couple of years ago, and also implies a premium compared to Caterpillar’s historical average.

That said, considering the double-digit EPS growth expected in the short-term, the valuation is not crazy high. From that perspective, Caterpillar is trading at 14.4 times its expected FY2023 net income, which, if anything, likely suggests upside.

Further, considering that shares currently yield 2.1%, with attractive dividend growth prospects ahead, dividend growth investors are likely to find Caterpillar’s investment case enticing in the current ultra-low rate environment.

Wall Street’s Take

Turning to Wall Street, Caterpillar has a Moderate Buy consensus rating, based on six Buys, two Hold, and one Sell assigned in the past three months. At $241.33, the average CAT price target implies 18.3% upside.

Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.

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