Caterpillar (NYSE:CAT) is the world's leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The company principally operates through its three product segments: Construction Industries; Resource Industries and Energy & Transportation, and also provides financing and related services through its Financial Products segment.
Construction Industries together with Energy & Transportation are the two largest segments, followed by the much smaller Resource Industries and Financial Products.
None of their segments fared well in the recent 4th quarter 2015 report. Compared to Q4 2014, all the segments showed a decline in sales and revenue. Energy & Transportation had sales and revenue of -29%, followed by Resource Industries at -23%, Construction Industries at -18% and Financial Products segment at -8%.
According to the quarterly report, the two most significant reasons for the decline in sales in 2015 were weakening economic growth in developing countries and substantially lower commodity prices, most notably crude oil. In particular I am expecting the commodity headwind to last for a long, long time. While the price of crude oil might recover sometime in the near future, it's likely that it will not have a big effect in capital spending for oil related companies. I believe that should the price of oil recover, related companies will focus on paying their dividends and deleveraging instead of increasing CAPEX. This means that even in the best case scenario, Caterpillar will be feeling the effects of this headwind for years to come.
The company points out that significant declines to Construction Industries came from weakened construction activity in China and Brazil. Looking at the estimates, neither of these countries is expected to improve in the near future as the Chinese GDP growth is estimated to continue declining for several years, current expectation for 2016 is GDP growth of 6-7%. In Brazil the GDP growth is expected to be negative for 2016. It certainly looks like this headwind too will continue throughout 2016 and even further.
Currently, Caterpillar pays a quarterly dividend of $0.77. That amounts to a total of $3.08 per year, resulting in a yield of 4.95% at the current share price of $62.24. The management is committed to increasing the dividend on a yearly basis, so below we will take a look to see if they can afford to do so this year. The next dividend increase is expected to be declared in June 2016.
The EPS for 2015 was $3.50, a 40% decline from $5.88 in 2014. However, this is not only due to weaker revenue; the company reports that EPS excluding restructuring costs was $4.64. Additional restructuring costs are expected for 2016, though their impact will be less severe than in 2015. The EPS estimate, restructuring costs included, for 2016 is $3.50. Current EPS payout ratio, as well as the expected payout ratio for 2016 (excluding the possible dividend increase) is 88%.
Their operating cash flow for the year was $5.2 billion, with capital expenditures at $1.6 billion. With the current dividend taking up $1.8 billion per year, we can see that cash flow doesn't present a problem at its current levels. In 2015 the company also spent $2.0 billion in share repurchases, which are expected to continue throughout 2016. The financial segment is excluded from these cash flow numbers.
The Future For CAT and Their Dividend
Overall, the situation looks grim for Caterpillar. While they are cutting their own expenses, it certainly wasn't enough to save their 2015 results and it looks like the major headwinds for the company will continue to put pressure on their earnings during 2016 and further into the future. I expect both revenue and EPS to decline during 2016.
Despite the recent weakness in all segments, Caterpillar still looks to be in good financial shape. Their dividend is well covered by both EPS and cash flow, while both restructuring costs and capital expenditures are expected to decrease in 2016. Management has declared that the dividend is a priority, therefore there is also the possibility of reducing their repurchases to accommodate dividend growth both in 2016 and later in the future. I do not expect a reduction in repurchases; I'm merely stating that it could be done in the future if necessary. On top of everything else, the company currently has about $6.5 billion in cash and short-term investments.
At this point, Caterpillar looks to be well-positioned to take another step towards becoming a dividend aristocrat by rewarding their shareholders with their 23rd consecutive year of dividend increases. A high dividend yield combined with good financial metrics makes CAT look interesting for income investors, however, the outlook for 2016 remains extremely weak and investors might be better off waiting for better entry points.
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.