Consistent High Yield Stock #4: Caterpillar Inc. (NYSE:CAT)
Caterpillar Inc. (NYSE:CAT) is the global leader in earth moving equipment manufacturing. The company serves the following industries (among others):
– Mining
– Logging
– Petroleum
– Agriculture
– Construction
– Road building
The decline in metal and energy prices have caused Caterpillar’s earnings to fall. The company’s customers are purchasing less equipment because of low commodity prices.
Declining earnings led to a declining share price. Caterpillar’s share price has fallen around 40% since Summer of 2014. This has resulted in a steep rise in Caterpillar’s dividend yield. The company is currently yielding 4.8%. The company is trading around dividend yield highs not seen since the Great Recession.
Whenever commodity prices decline, fears of Caterpillar dividend cuts surface. The company is expected to earning $3.50 in 2016. This would be the worst year for Caterpillar since 2009. The stock currently pays $3.08 per share in dividends. Even at commodity cycle lows, Caterpillar will be able to fund its dividend from earnings.
Caterpillar Inc. (NYSE:CAT) has paid steady or increasing dividends for 33 consecutive years. It is very unlikely the company reduces its dividend any time soon.
The company’s consistency is a result of keeping a relatively low payout ratio during prosperous times. This allows Caterpillar to continue paying steady or rising dividends during down cycles.
The company must have a strong competitive advantage to pay steady or rising dividends for 33 years and be a market leader. Caterpillar’s competitive advantage comes from its industry leading size and brand name. The Caterpillar name is synonymous with heavy equipment in the construction industry. Caterpillar’s competitive advantage is a combination of its size, brand, and manufacturing expertise.
Caterpillar Inc. (NYSE:CAT) may be cyclical, but it has produced excellent long-term growth.
From 1999 through 2014, Caterpillar compounded its earnings-per-share at 11.1% a year. In addition, the company has managed to increase margins over time. In 2005, Caterpillar’s operating margin was 16.6%. In fiscal 2015, it was ~19%.
Caterpillar will likely grow earnings-per-share by at least 7% a year over a full economic cycle. That’s a very conservative estimate. I believe it is more likely the company compounds its earnings-per-share at closer to 10% a year.
The growth drivers for Caterpillar are:
– Share repurchases
– Increased efficiency (higher margins)
– Global growth, especially in developing markets
Caterpillar’s historically high dividend yield shows it is likely undervalued at current prices. The company’s long-term growth rate of 7% to 10% a year combined with its 4.8% dividend yield gives investors expected total returns of 11.8% to 14.8% a year.
Between July and September of 2015, the number of funds bullish on Caterpillar among the investors tracked by Insider Monkey went up by 10 to 40, while the aggregate value of their positions was equal to around 3% of the company. In the current round of 13F filings, Natixis Global Asset Management’s Harris Associates reported holding around 17.1 million shares of Caterpillar.
Follow Caterpillar Inc (NYSE:CAT)
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Final Thoughts
The 4 companies in this article all have above average dividend yields, strong competitive advantages, and solid growth prospects. Three of the four (Philip Morris is the exception) trade at low price-to-earnings ratios.
Dividend growth investors can lock in high dividend yields with these stocks. Better yet, the dividends should keep coming (in ever larger amounts) in the future.
Steadily rising dividend income is the benefit of holding high quality dividend growth businesses for the long run.
When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.
– Warren Buffett
Disclosure: None
