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Caterpillar (CAT) Hikes Dividend After a Gap of 2 Years

Zacks Equity Research

Caterpillar Inc. CAT announced that its board of directors have approved a 1.3% increase in quarterly dividend to 78 cents per share after a hiatus of two years. The move reflects the company’s balance sheet strength and improved cost structure which has once again enabled it to deliver incremental returns to shareholders.

The increased dividend will be paid on Aug 19, 2017, to shareholders of record as of Jul 20, 2017. The last dividend hike had come in Jun 2015, when it was hiked by 10% from 70 cents to 77 cents. Starting from 1990, Caterpillar had been hiking its dividend every summer, starting with quarterly payout due in July. During the recession Caterpillar had refrained from hiking dividends and resumed its trend of increasing dividend in Jun 2010. Caterpillar once again was forced to maintain its dividend in the last two years as it bore the brunt of a weak mining sector.

Nevertheless, the company has consistently paid a cash dividend every year since it was formed and paid a quarterly dividend since 1933. Over the span of 10 years, its cash dividend has grown from the payout of 30 cents per share to the current payout of 78 cents.

Caterpillar, Inc. Price
 

Caterpillar, Inc. Price | Caterpillar, Inc. Quote

Caterpillar’s has a five year average dividend yield of 3.09%, five year dividend growth rate of 11.8% and payout ratio of 76%. With the increased dividend,  Caterpillar’s dividend yield will go up from the current 2.90% to 2.98%, higher than Deere & Company’s DE 1.90%. Caterpillar’s current dividend yield of 2.94% is also higher than the Zacks categorized Machinery – Construction/ Mining sub industry’s dividend yield of 2.74%.



Caterpillar which has so far been grappling with the commodities rout triggered by a slowdown in China and excess supplies of most metals and energy products, is showing signs of a turnaround this year. This was made possible by its relentless cost saving actions along with improvement in construction and Asia Pacific. In the first quarter of 2017, the company delivered year-over-year improvement in both the top line and bottom line for the first time in 10 quarters. Backlog improved on a year-over-year basis for the first time since the third quarter of 2014. Further, Caterpillar’s March sales growth of 1% put an end to its unprecedented 51-month long stretch of declining sales.

Caterpillar’s cash and liquidity position also remains strong with the company ending the first quarter with cash and short-term investments of $9.47 billion. Debt-to-capital ratio at ME&T was 41.7%, within its targeted range of 30–45%. ME&T operating cash flow for the first quarter was $1.5 billion, compared with $0.2 billion in the prior-year quarter. The company has about $3.7 billion remaining of the $10 billion share-repurchase program that the board approved in the first quarter of 2014, which expires in 2018. Resumption of share repurchases will be accretive to earnings.

Quoting activity remains promising in many of Caterpillar’s markets and retail sales are turning positive for both machines and Energy & Transportation for the first time in several years. The company estimates revenues around $38 to $41 billion for 2017 that depicts a 2% rise from the revenues reported in fiscal 2016. The company now anticipates earnings per share (excluding restructuring costs) of $3.75, reflecting a 10% improvement over 2016 earnings.



The company has performed close to the Zacks categorized Machinery-Construction/Mining subindustry on a year-to-date basis. Shares have gained 14.7% while the industry registered an increase of 15%.

Caterpillar’s sales in Construction Industries have shown signs of improvement lately. The construction industry has now entered a more mature phase of expansion, and construction spending can be anticipated to see moderate gains through 2017 and beyond. The company is also witnessing growth in Asia Pacific which will likely be a growth driver.

Another factor working in favor of Caterpillar is its endeavours to reduce costs in the wake of weak demand. In Sep 2015, Caterpillar set upon significant restructuring and cost reduction initiative, with actions expected through 2018. Once fully implemented, the plan would aid lower its annual operating costs by about $1.5 billion. Going forward, Caterpillar is expected to benefit from President Trump’s plans of big spending in infrastructure as it is anticipated to play a major role in the national infrastructure plan.

Caterpillar currently sports a Zacks Rank #1 (Strong Buy).

Other top-ranked companies in the industrial product space include AGCO Corporation AGCO and Rockwell Automation Inc. ROK. AGCO flaunts the same rank as Caterpillar while Rockwell Automation carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

AGCO has expected long-term growth of 12.11%.

Rockwell Automation has an expected long-term growth of 10.63%.

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