We recently published a list of 10 Cheapest Dividend Aristocrats to Buy Now. In this article, we are going to take a look at where Caterpillar Inc. (NYSE:CAT) stands against other cheapest dividend aristocrats to buy now.
Dividend Aristocrats refer to companies with a strong track record of increasing their dividends for at least 25 consecutive years. These stocks are often favored by investors due to their reputation as dependable sources of income. A company’s ability to raise dividends consistently over decades is considered an indicator of financial resilience and stability. In addition, these stocks have demonstrated strong long-term performance, often surpassing other asset classes. According to a ProShares report citing FactSet data, the Dividend Aristocrat Index delivered a notable return of 27.7% between March 2022 and April 2023, outperforming the broader market, which posted a 25.2% return over the same period.
A company’s history of annual dividend increases, regardless of its length, does not guarantee that future payouts are secure. However, when management frequently highlights these streaks in earnings calls and annual reports, it suggests a strong commitment to maintaining and growing dividends when making capital allocation decisions. Even so, history shows that some Dividend Aristocrats have had to reduce their payouts, leading to their removal from the list.
The year 2020 served as a significant test of dividend durability among these companies. When the COVID-19 pandemic struck in March, consumer demand in several industries declined sharply. As a result, numerous companies either cut or suspended their dividends, some voluntarily and others as a condition of accepting government stimulus funds. By the end of 2020, a total of 66 companies in the broader market had distributed less in dividends than they had in 2019, according to a report by Morningstar.
While a dividend cut poses a risk, it can also create opportunities. Short-term investors focused solely on high dividends often sell their shares when a company reduces its payout. This can open the door for long-term, value-oriented investors to purchase shares at more attractive prices. Simon Adler, value equity fund manager at Schroders, made the following comment about this:
“We would never tell a company what its dividend should or should not be. Instead, we prefer to afford the management teams of companies in which we invest the space and the confidence to cut their dividend if they feel it is unsustainable or the money is better spent elsewhere. Far better it takes that approach than overstretch its balance sheet to pay a dividend it cannot afford.”
Dividend-paying stocks are often linked to value investing, as they typically offer higher yields and stronger financial fundamentals compared to growth stocks. A report from S&P Dow Jones Indices noted that income-focused investment strategies tend to exhibit characteristics associated with value stocks. Companies with high dividend yields and lower valuations frequently draw investor interest. However, the report also highlighted that the Dividend Aristocrats Index is not strictly value-focused. Instead, it maintains a balance between growth and value stocks. A long-term analysis of the index from 1999 to 2022 showed that, on average, 59.04% of its holdings fell into the value category, while 40.94% were classified as growth stocks.
Our Methodology
For this list, we scanned the list of the Dividend Aristocrats, the stocks that have raised their payouts for 25 years or more. From this group, we identified 10 stocks with the lowest price-to-earnings (P/E) ratios. The chosen stocks featured in the list exhibit a forward P/E ratio below 25 as of February 14. The stocks are ranked in ascending order of their P/E ratios.
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A construction crew operating a hydraulic shovel during a nighttime project.
Caterpillar Inc. (NYSE:CAT)
Forward P/E Ratio: 17.61
Caterpillar Inc. (NYSE:CAT) is an American company that specializes in construction, mining, and other engineering equipment. The company’s leadership in manufacturing heavy machinery and equipment is strengthened by its focus on innovation and operational efficiency. The company actively invests in technology and process enhancements to overcome supply chain challenges and the cyclical nature of the industrial sector. As global infrastructure development and construction projects expand, Caterpillar is well-positioned to capitalize on the rising demand for its products. In the past 12 months, the stock has surged by over 11.5%.
In the fourth quarter of 2024, Caterpillar Inc. (NYSE:CAT) reported revenue of $16.2 billion, which fell by 5% from the same period last year. The decline was mainly attributed to a $859 million drop in sales volume, which was primarily caused by changes in dealer inventories and reduced equipment sales to end users. Dealer inventory fell by $1.3 billion in the fourth quarter of 2024, compared to a $900 million decrease in the same period of 2023. Its profit per share came in at $5.78, compared with $5.28 in the prior-year period.
Caterpillar Inc. (NYSE:CAT) demonstrated a strong cash position in 2024. During the year, the company generated $12.0 billion in operating cash flow and finished the fourth quarter with $6.9 billion in cash. Over the course of the year, it allocated $7.7 billion for repurchasing Caterpillar shares and $2.6 billion for dividend payments. The company offers a quarterly dividend of $1.41 per share and has a dividend yield of 1.6%, as of February 14. It is one of the best dividend aristocrat stocks, as the company has been growing its payouts for 30 consecutive years.
Overall, CAT ranks 6th on our list of cheapest dividend aristocrats to buy now. While we acknowledge the potential for CAT as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than CAT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.