is there danger lurking in caterpillar inc.’s dividend?
TRANSCRIPT
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Is There Danger Lurking in Caterpillar Inc.’s Dividend?
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Caterpillar raised its quarterly dividend by 10% in June, putting its 2015 annual dividend at $3.01 per share. That’s a 215% jump since 2005.
Latest dividend boost
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Solid track record
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20150
0.5
1
1.5
2
2.5
3
3.5
Annu
al d
ivid
end
per s
hare
in $
Data source: Company financials. Chart by author
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Dividend yield
Thanks to regular dividend increases and the recent drop in its stock price, Caterpillar’s dividend yield is among the highest in the industry today.
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Best among all
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Dividend payout
Caterpillar also has the highest dividend payout ratio (percentage of profit paid out as dividend) among peers.
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Highest in the industry
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The question is:
In fact, at its projected 2015 earnings of $4.7 per share, Caterpillar will be paying out 64% of its profits in dividends. Is it sustainable?
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Let’s find out
A quick look at Caterpillar’s debt position, cash flows, and dividend payment history can give us an answer.
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Debt
Caterpillar’s long-term debt has climbed steadily over the years…
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Rising sharply
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Cash flows
…but so have its cash flows.
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Growing at a rapid pace
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No mean feat
More notably, Caterpillar’s free cash flows have exceeded net income during the past couple of years -- something no peer can boast.
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FCF > NI
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A green flag
That’s a huge positive since a company pays dividends out of its free cash flow.
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Dividend history
Caterpillar’s solid dividend history further strengthens its case.
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Caterpillar has: paid a cash dividend every year since it was formed in
1925
more than doubled its cash dividend since 2006
paid out higher annual dividends to shareholders for 21 consecutive years
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To summarize: Caterpillar
Is cash flow positiveGenerates strong free cash flowsHas control over its debtHas an excellent dividend-payment historyHas a comfortable payout ratio with room to grow
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Foolish takeaway: No risk
Caterpillar is well-positioned to sustain, and even grow, its dividends going forward despite weak industry conditions.
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