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Wednesday, August 21, 2013

Recent Buy: CAT

Aug 20, 2013: Bought 30 shares of CAT at $83.73 per share.

Caterpillar, Inc. (CAT) was founded in 1925 and is headquartered in Peoria, IL. CAT manufactures construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. It provides technology for construction, transportation, mining, forestry, energy, logistics, electronics, financing and electric power generation. 

CAT is a Dividend Contender with a 20-year streak of dividend increases. It pays quarterly dividends of $0.60 per share in February, May, August and November. Initial Yield on Cost is 2.87%.

Fair value estimates for CAT vary from $62.69 (Graham Number method) to $91.30 (S&P Capital IQ) to $94.00 (MorningStar). Compared with the median estimate of $91.30, my purchase price represents a discount of about 8%.

The following table provides some key statistics for CAT.
CAT does not quite adhere to the Chowder Dividend Rule – its dividend yield and 5-yr dividend growth rate adds up to 11.09%, instead of the desired 12%. Similarly, the 5-yr total payback percentage is 15.53%, and not the targeted 16%.  CAT does, however, pass the following selection criteria:
  • Dividend Payout ratio is below 65% (EPS Payout ratio is 37.85%)
  • 7-year weighted average dividend growth rate is 8.87% (at least 7%)
  • Forward P/E ratio is 11.11 and the trailing twelve month (TTM) P/E ratio is 13.30 (below 16)
One concern is CAT's high Debt to Equity ratio of 2.24, which is well above my preferred maximum ratio of 0.5. Digging into this at little, CAT's debt mostly represents the loans offered to buyers by their equipment dealerships. So I'm fine with that ratio...

CAT is a 5-star stock: (*******)

Other ratings for CAT

 MorningStar Rating  (*****)
 The Motley Fool 's CAPS Rating  (*****)
 S&P Capital IQ 's Stock Report (*****)Buy
 Thomson Reuters StockReport+ (7/10)Neutral 

Concluding Remarks

CAT appeared on my August dashboard of dividend growth candidates and is one of only two stocks in my Watch List in the Conglomerates sector. This purchase expands my sector diversification to six of nine sectors.

With a 16% year-over-year revenue decline, CAT's most recent quarterly results disappointed. The company blamed declining commodity prices, rising operating cost, and China's economic slowdown for the poor performance of its mining business. CAT has taken cost-cutting measures, including further layoffs to reduce its cost structure.

On the other hand, mining companies will be reducing their capital expenditure due to the overall slowdown. CAT will benefit from increased demand for aftermarket parts and services, which typically provide higher margins compared to those of new equipment sales.

Though CAT is not doing so well presently, it plans to buy back $1 billion of its shares in this quarter alone. The buy back is part of CAT's $7.5 billion share repurchase authorization. Share buy backs reduce the number of outstanding shares and increase the relative value of each share, and can be viewed as an indirect dividend payment to investors. Along with its recent 15% dividend increase, I feel CAT represents a good long-term investment.

CAT is my 14th dividend stock purchase for DivGro. 30 shares of CAT represent $72 of expected annual dividend income, which increases DivGro's forward 12-month projected dividend income to $1,519.95.

Full Disclosure: Long CAT


  1. Nice buy. If CAT wasn't slightly overweight I'd be adding more shares here. It's currently below my cost basis.

    1. Thanks for checking in. I'm still expanding and diversifying, so adding one of the solid dividend payers is good.


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