{"id":86129,"date":"2023-11-18T17:43:30","date_gmt":"2023-11-18T22:43:30","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/dividend-brilliance-economic-risks-important-message-for-caterpillar-investors-cat\/"},"modified":"2023-11-18T17:43:34","modified_gmt":"2023-11-18T22:43:34","slug":"dividend-brilliance-economic-risks-important-message-for-caterpillar-investors-cat","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=86129","title":{"rendered":"Dividend Brilliance & Economic Risks: Important Message For Caterpillar Investors (CAT)"},"content":{"rendered":"
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Introduction<\/h2>\n

It’s time to dive into macroeconomics and one of my favorite (cyclical) dividend growth stocks on the market: Caterpillar Inc. (NYSE:CAT<\/span>)<\/strong>. <\/p>\n

As it turns out, Caterpillar is currently the smallest holding of my 20-stock dividend growth portfolio. That’s not necessarily because of its performance (I’m up roughly 100% since my initial investment) but because I haven’t bought a lot more Caterpillar in recent quarters. <\/span><\/p>\n

The reason is my defensive stance toward cyclical investments. Although I have upped my stakes in cyclical investments like railroads and energy, I have not yet made the decision to throw some of my excess cash at machinery companies. <\/p>\n

On September 1, I wrote an article titled Caterpillar Goes Boom! Now What?<\/em>. In that article, I discussed the company’s strong 2Q23 results and my belief that it may be a bit early to invest in this yellow machinery giant. <\/span><\/p>\n

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While the company’s long-term growth prospects look promising, the current valuation leaves little room for immediate upside.<\/em><\/p>\n

For dividend investors, Caterpillar’s commitment to growing free cash flow, a strong balance sheet, and an A+ credit rating offer a promising proposition.<\/em><\/p>\n

As a shareholder, I’m keeping a watchful eye, anticipating a potential buying opportunity of around $220 if economic headwinds create a more favorable entry point.<\/em><\/p>\n<\/blockquote>\n

Despite its recent stock price surge, the stock is still trading 11% lower since that article came out. <\/p>\n

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\"Chart\"
Data by YCharts<\/figcaption><\/figure>\n<\/p>\n

Even though I’m long, I’m happy about that, as the recent stock market surge has ruined a lot of good buying opportunities – especially in light of ongoing economic weakness. <\/p>\n

In this article, I’ll re-assess the risk\/reward using new macroeconomic developments, the company’s 3Q23 earnings, and the value this dividend aristocrat brings to the table. <\/p>\n

So, let’s get to it!<\/p>\n

Dividend Brilliance<\/h2>\n

Generating shareholder value is hard – very hard. While we may take dividends for granted, we should continue to remind ourselves that the ability to consistently grow dividends is something that takes serious skill.<\/p>\n

To give you an example, looking at the chart below, we see that 40% of Russell 2000 companies have negative earnings. That’s as high as it was during the peak of the Great Financial Crisis and even scarier if we consider that this is outside of an official recession!<\/p>\n

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Apollo Global Management<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

Consistently growing dividends is even harder in cyclical industries. <\/p>\n

Caterpillar has done it for 30 consecutive years, making it a dividend aristocrat. <\/p>\n

Even better, the company is a dividend aristocrat with a great dividend scorecard. <\/p>\n

Looking at the overview below, it scores high on dividend consistency (that one is obvious), dividend growth, safety, and yield. <\/p>\n

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Seeking Alpha<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

The bad news is that the company pays a $1.30 per quarter per share dividend. This translates to a 2.1% yield, as one share currently sells for $253.<\/p>\n

A 2.1% yield is nothing to write home about in this market. If I wanted to buy income, I could easily buy high-quality companies yielding up to 6% without having to go dumpster diving. <\/p>\n

However, there’s more to it than its yield. <\/p>\n

CAT’s dividend is protected by a 25% payout ratio. It has hiked its dividend for 30 consecutive years and grown its dividend by 8.8% per year (on average) over the past five years. <\/p>\n

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\"Chart\"
Data by YCharts<\/figcaption><\/figure>\n<\/p>\n

Markets love consistency and companies that prove their ability to thrive through many economic cycles – even if it’s a cyclical company like CAT that will almost certainly have the occasional implosion in its earnings when the economy enters a recession. <\/p>\n

Hence, despite a very steep manufacturing recession in 2015, a pandemic, and the post-2021 sell-off, CAT has returned close to 300% over the past ten years, beating both the S&P 500 and the industrial ETF (XLI) by a wide margin. <\/p>\n

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\"Chart\"
Data by YCharts<\/figcaption><\/figure>\n<\/p>\n

It also bought back a fifth of its shares over the past ten years, which has added tremendously to its ability to outperform the market. After all, buybacks improve the per-share value of a company. <\/p>\n

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\"Chart\"
Data by YCharts<\/figcaption><\/figure>\n<\/p>\n

I obviously cannot guarantee that the stock will continue to outperform over the next ten years. However, I’m making that assumption, as the company is strong and benefitting from a number of tailwinds – despite mounting cyclical headwinds. <\/p>\n

Oh, it also has an A-rated balance sheet, which is one of the highest ratings in general, especially in the machinery industry. <\/p>\n

What Is Caterpillar Up to?<\/h2>\n

Normally, this is the part where I give you my view on the economy. <\/p>\n

However, as Caterpillar’s earnings and comments reveal so much about the economy, I’m going to combine my view with the company’s comments.<\/p>\n

At the end of October, the company reported its 3Q23 earnings, which were good. <\/p>\n