Updated Jan 23, 2023 Quinn Mohammed
Each year, we separately review the Dividend Aristocrats, a group of 65 stocks in the S&P 500 Index that have raised their dividends for at least 25 consecutive years.
To be on the Dividend Aristocrat list, a company must have a profitable business model with a valuable brand, a global competitive advantage, and the ability to withstand recessions. This is why Dividend Aristocrats are able to keep raising their dividends in difficult years.
With this in mind, we have compiled a list of all 65 Dividend Aristocrats.
Click the link below to download a free copy of the Dividend Aristocrats List, along with key financial metrics such as price-to-earnings ratio and dividend yield.
Caterpillar Inc. (CAT) joined the Dividend Aristocrats list in 2019. Even more impressive is the fact that Caterpillar operates in a highly cyclical industry. This usually prevents companies from achieving a long history of annual dividend increases.
But Caterpillar’s management has proven its commitment to returning cash to shareholders, even through years of inevitable business ups and downs. Caterpillar also has a lasting competitive advantage that allows it to raise its dividend year after year, even during a downturn in the global economy.
Business overview
Founded in 1925, Caterpillar today manufactures and sells construction and mining equipment. The company also manufactures ancillary industrial products such as diesel engines and gas turbines. Caterpillar stock has a market capitalization of approximately $130 billion, making him one of the world’s largest industrial stocks.
Industrial manufacturers benefited from strong demand in 2022 and 2021, fueling growth from the low base established in 2020 amid the pandemic and spurring global economic activity. Caterpillar is also particularly affected by the energy and mining industries, which have benefited from higher commodity prices.
October 27th2022, Caterpillar reported results for the third quarter of 2022 for the period to September 30th, 2022. The company reported quarterly revenue of $15 billion, up 21% compared to Q3 2021. The construction industry, resources industry, and energy and transportation registered increases of 19%, 30%, and 22% respectively. All segments posted significant gains in the quarter.
Source: Presentation for investors
This has allowed Caterpillar to deliver solid results across the board. Adjusted earnings per share in the third quarter were $3.95 for him in the fourth quarter, compared with $2.66 in the same period last year.
Source: Presentation for investors
Additionally, Caterpillar returned $2 billion to shareholders through dividends and share buybacks during the quarter. The company also had $6.3 billion in operating capital.
For the full year, Caterpillar expects adjusted earnings per share to be approximately $13.70.
growth outlook
Caterpillar is closely tied to global economic growth and commodity prices. Economic growth is key to funding its development, as its customers extract resources from the earth and build and construct a wide variety of structures.
We can see that this gives Caterpillar results some pretty extreme periodicity, with the stock price fluctuating wildly between the extremes of the sentiment scale.
While the coronavirus pandemic weighed heavily on the company, the ensuing global economic recovery enabled Caterpillar to achieve strong profitability in 2021. In 2022, the theme continues, with Caterpillar offsetting increased manufacturing costs with price increases. Caterpillar looks poised for record results in 2023.
In addition, Caterpillar’s unique cost-cutting measures have improved operating margins over the years. Most of the gains may have been realized, but there is potential for further cost reductions to boost earnings positively.
However, the current environment of rising interest rates could cause an economic slowdown, which could cause Caterpillar customers to postpone new equipment purchases.
Revenue is expected to improve significantly in 2022, growing by more than 25% year-on-year. He forecasts earnings per share of $13.70 in 2022 and 5% growth over the medium term.
This reflects both caution regarding the cyclical nature of the business and Caterpillar’s ability to bounce back when demand recovers.
Competitive Advantage and Recession Performance
Competitive advantage in industrial applications can be difficult given that some competitors make similar products for most applications.
Over the years, however, Caterpillar has grown to become one of the largest players in profitable end markets such as construction, energy and mining.
Its global presence gives it some degree of diversification in revenue not only by segment and industry, but also geographically, which has worked well in recent years. is improved.
But Caterpillar is not immune to recession. A global economic slowdown is usually accompanied by lower commodity prices and slower construction spending.
These factors took a toll on Caterpillar’s earnings during the Great Recession. It took a temporary but devastating blow to earnings.
Caterpillar’s earnings per share during the Great Recession were as follows:
- Earnings per share of $5.32 in 2007
- Earnings per share of $5.71 in 2008, up 7%
- Earnings per share of $1.43 in 2009 (down 75%)
- 2010 earnings per share of $4.15 (up 190%)
Caterpillar certainly felt the pain of the Great Recession, but earnings recovered fairly quickly, returning to pre-recession earnings per share in 2011.
Caterpillar also saw a significant decline in earnings per share in 2020 due to the coronavirus pandemic, but has since rebounded strongly in a short period of time.
It is therefore clear that Caterpillar is exposed to recession due to the economic leader nature of the heavy equipment industry. But it also has a history of recovering fairly quickly from recessions.
Valuation and Expected Return
Caterpillar’s current price/earnings multiple is 18.2, based on a projected 2022 EPS of $13.70. This is Caterpillar’s elevated rating. Since 2012, Caterpillar stock has traded at an average P/E of approximately 16.5. Given Caterpillar’s cyclical business and vulnerability to recession and the current rising interest rate environment, we believe 15 is a reasonable and fair value estimate for Caterpillar.
Cycle periods are the norm when it comes to Caterpillar valuations. Today, stock prices are rising moderately relative to earnings. This may reduce future earnings. If the P/E multiple declines from 16.0 to 15.0 over the next five years, the annual return will decline by 3.8% per year over that period.
Another downside to stocks with high valuations is their low dividend yields. As Caterpillar’s stock has risen in his year, his dividend yield has fallen to 1.9%. Dividends and his earnings-per-share growth (expected at 5% annually) add to shareholder returns, but the stock’s overvaluation is a hurdle to clear.
Based on the factors above, we see a total return of 3.3% per annum. This puts Caterpillar’s rating on hold today.
final thoughts
Caterpillar’s stock continues its impressive rally, gaining more than 17% over the past year compared to a nearly 11% decline in the S&P 500 Index. Performance in 2022 is expected to be strong, as earnings and his earnings per share surged significantly in 2021 due to strong demand and rising commodity prices. Stocks trade above average PE and fair value estimates, but are not grossly overvalued.
Caterpillar has an industry-leading brand and a positive long-term growth outlook, but the stock price simply feels overvalued after the rally since the pandemic lows. We rate this stock as a Hold due to our expectations of fair future returns. Investors may be better off waiting for the stock price to fall.
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