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It looks like Caterpillar Inc. (NYSE:CAT) is about to go ex-dividend in the next 3 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. In other words, investors can purchase Caterpillar's shares before the 19th of July in order to be eligible for the dividend, which will be paid on the 20th of August.
The company's next dividend payment will be US$1.11 per share, and in the last 12 months, the company paid a total of US$4.12 per share. Calculating the last year's worth of payments shows that Caterpillar has a trailing yield of 2.1% on the current share price of $211.64. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Caterpillar paid out 65% of its earnings to investors last year, a normal payout level for most businesses. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It distributed 44% of its free cash flow as dividends, a comfortable payout level for most companies.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. This is why it's a relief to see Caterpillar earnings per share are up 8.4% per annum over the last five years. Decent historical earnings per share growth suggests Caterpillar has been effectively growing value for shareholders. However, it's now paying out more than half its earnings as dividends. Therefore it's unlikely that the company will be able to reinvest heavily in its business, which could presage slower growth in the future.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, Caterpillar has increased its dividend at approximately 9.7% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
Has Caterpillar got what it takes to maintain its dividend payments? Earnings per share growth has been modest and Caterpillar paid out over half of its profits and less than half of its free cash flow, although both payout ratios are within normal limits. In summary, while it has some positive characteristics, we're not inclined to race out and buy Caterpillar today.
So while Caterpillar looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. Our analysis shows 2 warning signs for Caterpillar that we strongly recommend you have a look at before investing in the company.
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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