Friday, June 13, 2008

Caterpillar is hot

Heavy equipment maker Caterpillar Inc. (CAT) raised its quarterly dividend by 17% this week, from $0.36/share to $0.42/share. CAT has impressively doubled their dividend since 2005, however their dividend growth history has not been as consistent as I would like it to be in order to add this stock to my watch list. For example, from July, 2000 to April, 2004 CAT's dividend grew from $0.170/share to $0.185/share, growth of a measly 2% per year. CAT's EPS (earnings per share) were actually higher in 1998 vs. 2003.

Obviously CAT is a cyclical company who benefits from large scale construction and mining activity but can be hit hard when the cycle turns and activity slows down. Overall I think CAT is a great company and a great brand, however I view the business model as not consistent enough for my long term dividend growth portfolio. The stock has had a massive run up since 2002 as their earnings have increased nicely. CAT currently yields about 1.8%.


Nurse B, 911 said...

Good insight MG. I was fortunate enough to snag CAT back during the January turmoil and it falls within the enduring value theme I posted on for my RSP.

I actually bought the stock with the assumption that EPS could go down to $4/sh if economies were to contract significantly over the next 2 years and costs continue to increase - giving me around a 15x forward P/E. I really don't think that will happen with the need for global infrastructure, but we might see a more balanced growth in their business than the furious pace of the past few years.

Any strengthening of the USD will help/hurt them and it remains to be seen how much of a risk that might turn out to be or how the company balances it. Obviously a lower cost to global customers in other currencies has helped them in recent years.

Dividends4Life said...

mg: CAT is one that I have looked at for years, but could never get comfortable with.

Best Wishes,

Dividend Growth Investor said...

I am also hesitant to purchase CAT, even though it has been increasing its dividends for 15 years in a row. Seems too cyclical to me :-(