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Caterpillar: A Dividend Aristocrat Infrastructure Stock

Caterpillar: A Dividend Aristocrat Infrastructure Stock

Caterpillar logo on a digger arm at a CAT machine dealer. (Jorg Huttenholscher/Dreamstime)

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Monday, 12 August 2019 03:51 PM Current | Bio | Archive

Politicians don’t agree on much these days, but one thing they do agree on is that the U.S.’s infrastructure is in need of a major investment.

The nation’s highways, bridges, tunnels and railroads are in need of such repair that the leaders of both major political parties agreed to work together on a $2 trillion infrastructure plan earlier this year.

If a plan were to ever become law, it would likely benefit many companies that operate in the construction space.

One of our favorite infrastructure stock names continues to be Caterpillar (CAT).

Company Background and Recent Financial Results

Nearly 100 years old, Caterpillar is the largest manufacturer of construction and mining equipment in the world. The company is also a leading manufacturer of diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. Caterpillar trades with a market capitalization of $67 billion, with annual revenues of $45 billion.

Caterpillar reported second quarter financial results on 7/24/2019. The company earned $2.83 per share, which was $0.28 below estimates and a 5% decline from the previous year. Revenue grew 3% to $14.4 billion, though this was $42 million lower than expected.

Caterpillar updated guidance for 2019 on the conference call. The company now expects that EPS will come in near the low range of its previous forecasted EPS range of $12.06 to $13.06.

It should be noted that this forecast includes a $0.31 non-recurring discrete tax benefit. As such, we have excluded it from our estimates and instead expect Caterpillar to earn $12.25 per share in 2019. Producing this EPS total would result in a 10% increase from the prior year.

Over the last five years, Caterpillar has compounded EPS at a rate of 12%. Due to the company’s highly cyclical nature, we are more comfortable forecasting 5% EPS growth through 2024.

Dividend Analysis

Caterpillar currently yields 3.4%, which is more than double the average yield of the S&P 500. Even more impressive, the company has increased its dividend for 26 consecutive years. This qualifies Caterpillar as a Dividend Aristocrat, a group of S&P 500 stocks that have increased their dividends for at least a quarter of a century.

Caterpillar has increased its dividend:

  • With a CAGR of 2.9% per year for the past three years
  • With a CAGR of 4.5% per year for the past five years
  • With a CAGR of 7.2% per year for the past 10 years

Caterpillar increased its dividend a company record 20% for the upcoming 8/20/2019 payment. This is a massive increase given the company’s recent history of dividend growth.

For income investors, dividend safety is just as important as dividend growth. Caterpillar’s new annualized dividend of $4.12 represents just 34% of our expected EPS for 2019. This is well below the company’s 10-year average payout ratio of 52%.

Valuation and Total Returns

Caterpillar closed the 8/9/2019 trading session at a price of $119.38. Using our expected EPS for 2019 of $12.25, the stock has a P/E ratio of just 9.7. Given the quality of the company and its stature as a Dividend Aristocrat, we feel that the stock should trade with a P/E ratio of at least 14.

If the stock were to trade at this target by 2024, then valuation would be a 7.6% tailwind to annual returns over this period of time.

Total returns for Caterpillar would consist of the following:

  • 5% EPS growth
  • 3.4% dividend yield
  • 7.6% multiple expansion

Added up, we estimate that shares of Caterpillar can offer a total annual return of 16% through 2024.

Final Thoughts

There is little question regarding the need for an immense overhaul to infrastructure in the U.S. If political leaders were ever able to agree on such a plan then Caterpillar, given its size and scale, would likely be a major beneficiary.

Even without such an investment, Caterpillar’s stock is likely to offer mid-double-digit returns over the next five years. The stock offers decent growth prospects, a compelling and safe dividend yield and the possibility for multiple expansion.

While the company is very cyclical, Caterpillar receives a buy recommendation from Sure Dividend given the potential returns in the near future.

Thanks,

Ben Reynolds
Sure Dividend

Invest in the highest expected total return securities (and avoid the worst) by trying The Sure Analysis Research Database. And don't forget to subscribe to our YouTube Channel here.

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BenReynolds
Caterpillar’s stock is likely to offer mid-double-digit returns over the next five years. The stock offers decent growth prospects, a compelling and safe dividend yield and the possibility for multiple expansion.
eps, bridges, yield, highways
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2019-51-12
Monday, 12 August 2019 03:51 PM
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