Caterpillar Inc. (NYSE:) is a leader in manufacturing heavy machinery, inventing power solutions, and producing locomotives. In fact, the company is the world’s largest player in the heavy equipment space, with a dominant market share in the construction and mining machinery industry.
Caterpillar has many operations. They can however be divided into four categories: Construction, Resource, Energy and Transportation, and Financial Services.
Caterpillar sells equipment via a global dealer network. 45 are located in America, while 116 can be found internationally and serve 192 countries.
Due to Caterpillar’s unparalleled expertise amongst its industrial peers, the company is certainty well-positioned to benefit from the recently approved $1-trillion infrastructure bill. The stock is a strong buy. (See CAT stock charts on TipRanks)
Robust Financials Sustaining Growing Capital Returns
The recently approved infrastructure bill is going increase spending on construction machinery, which should increase the revenues of Caterpillar as it is the largest player in this field. Despite these one-time boosts, Caterpillar has produced solid results over the decades.
Industries can experience cyclical spending, which results in fluctuations over time. Caterpillar saw its revenues significantly drop after the Great Financial Crisis.
The company’s diversification cash flow and intelligent asset management, such as long-term equipment leases, financing for machinery, helped to keep its revenues stable.), operating cash flows have remained stable. Caterpillar hasn’t posted negative operating cashflows in over 16 years.
Caterpillar’s capital returns are a testament to this. Management has managed to keep them even in difficult situations. Caterpillar has hiked its dividend annually for 27 sequential years, which places it in the Dividend Aristocrats index.
This feat is remarkable considering the volatile nature of Caterpillar’s operations. The recent dividend hikes were also very positive, with both the 19.8% and 7.8% increases in DPS.
The current $4.44 annual payout rate implies a payout ratio of 43.5% against analysts’ estimates of EPS of $10.20 for the year. The infrastructure bill will likely drive EPS growth, with analysts expecting EPS growth rates of 22% and 15%, respectively.
Caterpillar will continue to pay shareholders well in the future through its dividend growth.
Caterpillar is currently trading at around 19 times next year’s net income.
This is a higher multiple than what Caterpillar was currently trading at a few years back. It also implies a premium relative to Caterpillar’s historic average.
However, given the expected growth of EPS by double-digits in the short term, this valuation does not seem excessive. Caterpillar’s expected FY2023 net profit is 14.4x, suggesting upside.
Given that Caterpillar shares yield 2.1% currently, and there are attractive dividend growth opportunities ahead, it is likely that dividend growth investors will find Caterpillar’s current investment case compelling in this ultra-low interest rate environment.
Wall Street’s Take
Turning to Wall Street, Caterpillar has a Moderate Buy consensus rating, based on six Buys, two Hold, and one Sell assigned in the past three months. At $241.33, the average CAT price target implies 18.3% upside.
Disclosure: Nikolaos Sismanis didn’t hold any positions in the securities discussed in this article at the time it was published.
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