Why I Bought CAT

I bought some shares of Caterpillar (CAT) today for my wife's RRSP (Registered Retirement Savings Plan). The basic thesis for this purchase is that for a long term hold, Caterpillar offers exposure to a leader in building out the infrastructure of the world. The short term may look very gloomy for this company, which presents a buying opportunity as the shares are down 65% from their all time high.

Caterpillar's CEO is actually predicting a return to 2008 sales levels within five years. This may or may not occur, but it is interesting to note that CAT was trading at C$63-C$85 during 2008 before the crisis hit.

Incidentally, the stock actually yields a surprising 5.5% and is maintaining the dividend for now in the face of the downturn.

Comments

[The Fox:]

The dividend is the problem and the reason I won't buy it. I agree with you that it is a premier company and that its product is needed. A cut in the yield, though, would send this thing reeling.

Jul 08 02:46 PM

[moneygardener:]

Would it though? Is anyone buying this for the yield, or expecting it not to be cut? The dividend was an afterthought for my purchase.

Jul 08 03:59 PM

[Larry House:]

It is hard to get excited about any company right now, but you appear to have made your purchase with your eyes wide open and feet on the ground. I think CAT is a wonderful company, but until the economy actually starts to get robust, CAT won't do very well. Long-term would be the only way to buy CAT. I hope it does splendidly for you--for your wife.

Jul 08 05:12 PM

[ksn murty:]

Yes cat is very good company u can trust this biggest earth movers
During recession it is invetable for any gaints. I hope Cat will recover
in future fast and better than any company It is a proud of USA

Jul 08 08:58 PM

[User 30200:]

I just purchased 1000 shares of CAT through my Edward Jones broker. He said that EJ expects CAT to double within the next 12 months.

Jul 09 09:09 AM

[donzelion:]

I'm building up a position gradually, since CAT has been on a down-cycle since early May. As a long-term hold, CAT looks far better in 2009 far better than it did in 2007, when most pundits sang its praises. I'm not sure about it doubling within 12 months, but if commodities do start shooting up, CAT makes the kit that makes the commodities possible, so it should ride the wave to some extent, while providing a dividend that beats inflation over the next 12 months. Better still, should the dollar tank, CAT will just earn more from it's global operations. Controlled risks + opportunity for capital appreciation + hefty dividend = good long-term hold prospect as far as I'm concerned.

Jul 09 12:34 PM

[Paul Zimbardo:]

@The Moneygardener

I am also bullish on CAT long-term, primarily for the dividend; however, I think you are setting your expectations a little too high in regards to the capital gains potential. I do not see CAT returning to either its all-time high or 2008 sales level any time soon.

I for one do not anticipate the dividend being cut (I hope to analyze CAT and its dividend in an upcoming article) but Paccar’s “prudent” dividend slashing has me worried. While their cash flow metrics appear similar at first glance (near identical payout ratios), the revenue and EPS trends paint a very different picture of the firm’s respective financial health. This developing situation requires further investigation.

Sources:
www.reuters.com/articl...
www.ft.com/cms/s/0/eac...

@User 30200

I hope you got that bold proclamation in writing. Did your broker also predict that CAT would fall over fifty percent the last year?

Jul 09 04:16 PM

[jg1945:]

I've been waiting to buy below $30 for dividend, as I'm retired. Hope there's no dividend cut foreseeable, as after October I'm down 38% in my retirement fund. As this point, I can't afford to lose anything, no matter how small. All I've been doing is averaging down to try and break even and get out of my non-dividend holdings.

Jul 09 04:17 PM

[Paul Zimbardo:]

@jg1945

If you are steadfast in your belief that you "can't afford to lose anything, no matter how small", then investing in CAT is certainly not for you. This is one of the riskier stocks and has a beta greater than 1.5, meaning that if the market moves one percent in either direction, on average, CAT will move 1.5% in the same direction. If you cannot afford any loses at all, equities are not the place for you.


On Jul 09 04:17 PM jg1945 wrote:

> I've been waiting to buy below $30 for dividend, as I'm retired.
> Hope there's no dividend cut foreseeable, as after October I'm down
> 38% in my retirement fund. As this point, I can't afford to lose
> anything, no matter how small. All I've been doing is averaging down
> to try and break even and get out of my non-dividend holdings.

Jul 09 10:48 PM