Caterpillar Inc. (NYSE: CAT) stock will trade ex-dividend in four days. This means that investors who buy stocks on or after April 23rd will not receive a dividend, which will be paid on May 20th.
Caterpillar’s upcoming dividend is $ 1.03 per share, following the last 12 months when the company paid a total of $ 4.12 per share to shareholders. Calculating last year’s Cash Value shows that Caterpillar has a trailing yield of 1.8% versus its current share price of $ 233.36. Dividends are an important source of income for many shareholders, but the health of the company is critical to sustaining those dividends. So we have to check whether the dividend payments are covered and whether profits are increasing.
Check out our latest analysis for Caterpillar
Dividends are usually paid out of company income. So when a company pays out more than it earns, its dividend is usually at greater risk of being cut. Caterpillar paid out more than half (75%) of its profits last year, which is a regular payout ratio for most companies. However, cash flows are even more important than profits in assessing a dividend. Hence, we need to check that the company has generated enough cash to pay its dividend. Last year, it paid out 53% of its free cash flow as dividends, which is in the normal range for most companies.
It is positive to see that Caterpillar’s dividend is covered by both earnings and cash flow, as this is generally a sign that the dividend is sustainable, and a lower payout ratio typically provides a greater margin of safety from being cut Dividend suggests.
Click here to view the company’s payout ratio and analyst estimates of future dividends.
NYSE: CAT Historic Dividend April 18, 2021
Have profits and dividends grown?
Companies with steadily growing earnings per share generally make the best dividend stocks because it is usually easier for them to grow dividends per share. Investors love dividends. So if profits go down and the dividend goes down, expect a stock to sell heavily at the same time. Therefore, it’s a relief that Caterpillar earnings per share have increased 5.4% per year over the past five years. Decent historical earnings per share growth suggests Caterpillar has effectively added value to shareholders. However, it now pays out more than half of its profits as dividends. If management continues to increase the payout ratio, we would take that as a tacit signal that the company’s growth prospects are slowing.
Many investors rate a company’s dividend performance by rating how much dividend payments have changed over time. Since our data began 10 years ago, Caterpillar has increased its dividend an average of 8.9% per year. It’s encouraging to see the company increasing dividends while increasing profits, which suggests at least some interest by companies in rewarding shareholders.
Final takeaway
Should investors buy or avoid Caterpillar from a dividend perspective? Earnings per share rose moderately, and Caterpillar paid out just over half of its earnings and free cash flow last year. All in all, we’re not particularly keen on Caterpillar from a dividend perspective.
So, if you’re looking to dig more on Caterpillar, it pays to understand the risks this stock faces. We have identified 3 warning signs with Caterpillar (at least 1 that matters), and understanding these should be part of your investment process.
However, we wouldn’t recommend buying just the first dividend stock you see. Here’s a list of interesting dividend stocks with a yield greater than 2% and an upcoming dividend.
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