Caterpillar Inc. (NYSE: CAT), as a cyclical stock has seen its ups and downs in earnings, and investors know well that a recovering economy is great for the future of the company. In the graph below we can find indications of the demand for future construction and it appears that the industry is still in an overall uptrend.
US Census Bureau and US Department of Housing and Urban Development launched new privately owned housing units: total units [HOUST], retrieved from FRED, Federal Reserve Bank of St. Louis, July 7, 2021.
This gives the company a solid standing as a resilient player with stable dividends.
We are also seeing signs that Caterpillar is poised for more market exposure, as it was recently included in several indices:
- Russell 3000E Growth Index
- Russell 3000 Growth Index
- Russell 1000 Growth Defensive Index
- Russell 1000 Value Defensive Index
- Russell 1000 Defensive Index
- Russell 1000 growth index
- Russell Top 200 Growth Index
Investors are often drawn to strong and reliable companies to reinvest dividends.
If you want to live off the income from dividends, it’s important to be significantly stricter with your investments.
While Caterpillar’s dividend yield isn’t the highest at 2.1%, we think the long payment history is quite interesting. The graph below shows the dividend yield, dividend per share and the corresponding earnings per share. While it may seem like a bumpy ride for EPS, the dividend per share appears to be steadily rising.
Explore this interactive chart for our latest analysis on Caterpillar!
NYSE: CAT Historic Dividend, July 2021
Investors should note that they may receive the next dividend payment scheduled for August 20, 2021 by purchasing Caterpillar stock within 11 days or before July 19. You must also hold the stock until the dividend is paid.
Let’s further examine how much the company pays and how sustainable payments are.
Dividends are usually paid out of company profits. When a company pays more dividends than it deserves, the dividend can no longer be sustainable.
So we need to get an idea of whether a company’s dividend is sustainable relative to net income after tax.
Caterpillar paid 65% of its earnings in dividends over the past twelve months. This is a healthy payout ratio, and while it limits the amount of earnings that can be reinvested in the company, there is also scope to increase the payout ratio over time.
Aside from comparing dividends to earnings, let’s see if the company has generated enough cash to pay out its dividend. Caterpillar’s cash distribution ratio was 44% last year, suggesting that dividends were well covered by the cash generated by the company.
It’s encouraging to see that the dividend is covered by both earnings and cash flow. This generally suggests that the dividend will be sustainable as long as earnings don’t drop abruptly.
We update our data on Caterpillar every 24 hours, so you always get our latest analysis of the financial situation here.
One of the biggest risks with relying on dividend income is that a company may run into financial problems and cut its dividend. Not only will your income be reduced, but the value of your investment will also decrease.
Caterpillar has been paying dividends for a long time, but for this analysis we’re only looking at payments over the past 10 years. During that period, the dividend was stable, which could suggest the company could have relatively consistent earnings power.
During the past 10-year period, the first annual payment in 2011 was $ 1.8, compared to $ 4.4 the previous year. This results in an annual growth rate of around 9.7% per year during this period.
Dividends have grown at a reasonable rate over this period, and without major cuts in payments over time, we think this is an attractive combination.
Dividend growth potential
While the dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) increased, as this is essential to maintaining the dividend’s purchasing power over the long term.
Strong earnings could fuel our interest in the company despite fluctuating dividends, which is why it’s great that Caterpillar has been largely profitable for the past 5 years.
Earnings per share also grew until 2020, then slipped and now recovered. However, with Caterpillar paying more than half of its profits in dividends, we wonder how Caterpillar will continue to fund its growth projects.
When we look at a dividend stock, we need to make a judgment about whether the dividend will rise, whether the company will be able to hold it in a variety of economic circumstances, and whether the dividend payout is sustainable.
Caterpillar payout ratios are in the normal range for the average company, and we like that cash flow was higher than reported earnings. However, we were glad the company increased its profits and paid a fairly consistent dividend.
Caterpillar scores well on this analysis, and investors appear to be expecting the possibility of construction growth and economic recovery as well. With the right valuation, it could be a solid dividend prospect.
However, there are other things that investors should consider when analyzing stock performance. Case in point: we have discovered 2 warning signs for Caterpillar (of which 1 concerns!) you should know.
If you’re a dividend investor, you should also check out our curated list of dividend stocks that deliver over 3% returns.
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Simply Wall St analyst Goran Damchevski and Simply Wall St do not have any position in any of the companies mentioned. This article is general in nature. It is not a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. Our goal is to provide you with long-term, focused analysis based on fundamentals. Note that our analysis may not take into account the latest company announcements or quality material, which may be sensitive to the price.
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