Is Caterpillar’s Dividend Worth It?

Over the past decade, Caterpillar Inc. (NYSE:CAT) has rallied over 200% but will this producer of construction, farming, and mining equipment, engines continue its upward trajectory against the backdrop of an increasingly uncertain economy?

Caterpillar may not be the first company you think of when imagining a future of connected devices but one of the main development goals set by management is the creation of smart machines that are automated and well-connected.

These machines are set to increase productivity by decreasing time wastage, resource consumption, and analyze data in real-time. For instance, its MineStar solution features an automation solution in the mining sector.

So what does this all mean for the stock, and is the dividend income from dependable cash flows worth the outlay?

Is Caterpillar’s Dividend Worth It?

Caterpillar’s dividend pays out $5.67 per share annually and yields 1.67% making it worth the investment for conservative income-seekers.

Caterpillar is well-known for its dependable dividends that makes it popular among passive income seekers and demonstrates the company’s long-standing policy of distributing value to shareholders.

Aside from stable income stream, Caterpillar has a strong track record of increasing annual payouts. The company’s policy of consistent dividend growth proves its commitment to paying out its profits to shareholders.

The company has consistently increased its dividend payouts for 30 years and is recognized as a member of the S&P 500 Dividend Aristocrats Index. But Caterpillar hasn’t simply continued increasing dividend payouts—it’s done so at an average rate of 8.6% CAGR over the past five years.

One of the key factors making reliable dividends possible for Caterpillar is the company’s diversification of revenue sources. With operations in construction, mining, energy, and transport, this wide berth of revenues leads to stability because whenever one area might be weaker the other picks up the slack.

Another factor in favor of Caterpillar’s dividend is the payout ratio is just 23.6%, meaning there is ample room for the Board of Directors to increase it.

Revenue Weakness Is A Concern

Caterpillar reported total revenue of $15.80 billion in the first quarter of 2024, roughly unchanged from the first quarter of last year and below analysts’ expectations of $15.99 billion but the company posted an adjusted EPS of $5.60, which surpassed estimates of $5.13.

Weakness may persist, at least in the short term, amid lower equipment sales, raising concerns about a potential decrease in demand.

Management aims to offset this decline by relying on higher sales prices and while keeping manufacturing costs stable to maintain current margins.

Construction equipment sales slowed, falling by 5% during Q1 2024 in all regions except North America, where construction demand is staying afloat thanks to government initiatives.

If there is one potential driver on the horizon, remarkably for this heavy machinery company it is in the area of artificial intelligence.

Is Caterpillar an AI Firm?

The inclusion of artificial intelligence and machine learning into Caterpillar’s portfolio extend its product and service functionality by revealing new patterns and approaches that were hitherto impossible to identify.

As such, the teams who run projects have the ability to make better decisions thanks to smarter insights and, as a result, lower operational expenses, and increase competitive benefits for customers.

The momentum of its research and innovation strategy has been a tailwind for Caterpillar to keep its market share and defend against competitors.

Caterpillar has also made significant leaps forward in electric and hybrid machinery in order to cut both emissions and fuel consumption that align with international campaigns focused on energy consumption.

So too has the company made a concerted effort to enhance productivity and safety using remote monitoring, diagnostics, and optimization. In addition, the development of digital technologies like telematics and fleet management improves customers’ command over business operations.

Is Caterpillar Stock a Buy?

Among the 23 analysts covering Caterpillar, the consensus price target of $351 per share suggests material upside opportunity for new buyers.

The range that analysts come in at, however, is quite wide with the low-end sitting at $249 per share and the high-end at $464 per share.

Other positive signs are evident in the choices of management, for example, to authorize a share buyback that signals insiders are confident in the prospects of the firm.

Caterpillar also has a remarkably low price-to-earnings ratio of 14.9x but an even better multiple relative to its revenue growth rate of 4.2% expected over the next 5 years. The company’s PEG sits at just 0.41, suggesting is substantially undervalued relative to earnings.

In addition, 8 analysts have revised their earnings estimates higher for the upcoming quarter, suggesting that sentiment is swinging in favor of Caterpillar bulls too.

Add to that 54 years of consecutive dividend payments and a 10-year growth streak and you end up with a compelling stock with substantial upside that pays a generous dividend yield.

A final note is that the company does operate with a reasonably high debt burden and trades at a high price-to-book multiple so it’s not necessarily a slam dunk winner but, absent an economic downturn, Caterpillar has the potential to outperform.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.