Caterpillar: Above Average Dividend Income Company, But Is Now The Time To Buy?

| About: Caterpillar Inc. (CAT)

Summary

Caterpillar Inc. dividend is well above average at 3.5% and has been increased for 8 of the last 10 years.

Caterpillar Inc. total return underperformed the Dow for my 45.2 month test period by 33.70%.

Caterpillar Inc. can restart its growth benefiting from increased demand in the construction machinery & heavy trucks sector but is dependent upon the world economy which is barely crawling along.

This article is about Caterpillar Inc. (NYSE:CAT) and why it's a dividend income company that is being looked at by The Good Business Portfolio guidelines. The question is can Caterpillar Inc. turn around and get back its past growth trend and should it be bought with the negative past total return and future slow growth. Caterpillar Inc. is a manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. Fundamentals of Caterpillar Inc. will be looked at in the following topics, The Good Business Portfolio Guidelines, Total Return And Yearly Dividend, Last Quarter's Earnings, Company Business Overview, and Takeaways And Recent Portfolio Changes.

Good Business Portfolio Guidelines.

Caterpillar Inc. passes 8 of 11 Good Business Portfolio Guidelines. These guidelines are only used to filter companies to be considered in the portfolio. For a complete set of the guidelines, please see my article " The Good Business Portfolio: Update To Guidelines and July 2016 Performance Review". These guidelines provide me with a balanced portfolio of income, defensive, total return and growing companies that keeps me ahead of the Dow average.

Caterpillar Inc. is a large-cap company with a capitalization of $53.8 Billion. Caterpillar Inc. is the by far largest American company in the construction machinery & heavy trucks peer group and this gives CAT plenty of strength to increase its business and buy bolt on smaller companies. The next biggest company is Komatsu Ltd. Ads (OTCPK:KMTUY) a Japanese company with a capitalization of $21.7 Billion.

Caterpillar Inc. has a dividend yield of 3.5% and its dividend has been increased for eight of the last ten years. The average payout ratio of the dividends for the past 5 years is moderate at 43% with a DGR of 18.0% over the last three years. Caterpillar Inc. therefore is a dividend income story. The dividend was not increased as normal at the year mark from the last increase and is $0.77/Qtr. for five quarters. I don't think the dividend will be increased until the company's earnings growth (after the cost reduction program is completed) and worldwide growth returns.

Caterpillar Inc. last quarter income was fair at $1.09/share beating the estimate of $0.96/Qtr., but was still much less than the earnings 3-4 years ago. This leaves Caterpillar Inc. enough cash flow, to pay its above average dividend and have a enough left over for its cost saving program of the business. Caterpillar Inc. has a yearly positive total cash flow of $6 Billion.

I also require the CAGR going forward to be able to cover my yearly expenses. My dividends provide 3.2% of the portfolio as income and I need 1.9% more for a yearly distribution of 5.1%. Caterpillar Inc. has a three-year CAGR of 3.0% (from Capital S&P IQ) missing my requirement. This is very important to me since being in retirement I need a certain amount of growth that I can count on, right now Caterpillar Inc. is in a cost cutting mode and waiting for the world economy to grow again.

Looking back five years $10,000 invested five years ago would now be worth over $13,900 today. This makes Caterpillar Inc. a poor investment for the growth investor looking back but does pay a high current dividend.

Caterpillar Inc. S&P Capital IQ rating is two stars or sell with a target price of $63. Caterpillar Inc. is 24% over priced at present compared to the target and an investor should look for a better entry point.

Total Return And Yearly Dividend

The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of the Good Business Portfolio. Caterpillar Inc. did better than the Dow baseline in my 45.2. month test compared to the Dow average. I chose the 45.2. month test period (starting January 1, 2013 and ending to date) because it includes the great year of 2013, and other years that had fair and bad performance. The total return of 5.5% makes Caterpillar Inc. not appropriate for the growth investor but has a 3.1% dividend and bought at a lower entry point. YTD total return for CAT is good at 30.2% well above the market short term. The dividend is well above average and covered by the earnings and has been paid and increased each year for eight of the last ten years.

DOW's 45.2. month total return baseline is 39.20%

Company Name

45.2. Month total return

Difference from DOW baseline

Yearly Dividend percentage

Caterpillar Inc.

+5.5%

-33.70%

3.5%

Last Quarter's Earnings

For the last quarter on July 26, 2016 Caterpillar Inc. reported earnings that beat expected at $1.09 compared to expected at $0.96 and last year at $1.31. Total revenue was lower at $10.34 Billion, lower than a year ago by 16.1% year over year and missed expected revenue by $280 Million. This was a fair report. Earnings for the next quarter are due in late October and are expected to be at $0.77 compared to $0.75 last year. Revenue and earnings compared to a few years ago are poor showing the lack of demand for the company's products as the worldwide economy continues to show weakness. Caterpillar Inc. should be avoided until the world economy shows signs of stronger growth.

Business Overview

Caterpillar Inc. is a manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The Company operates through its three product segments: Resource Industries, Construction Industries, and Energy & Transportation. It also provides financing and related services through its Financial Products segment. Its Construction Industries segment provides machinery for infrastructure and building construction applications. Its Resource Industries segment offers machinery for mine and quarry applications. Its Energy & Transportation segment offers reciprocating engines, generator sets, gas turbines and turbine-related services, diesel-electric locomotives and other rail-related products and services. Its Financial Products segment conducts its business through Caterpillar Financial Services Corporation (Cat Financial). Cat Financial provides retail and wholesale financing alternatives for Caterpillar products.

The company does have a headwind of the strong dollar which will most likely get stronger when the FED raises rates. The economy is showing moderate economic (about 2%) growth right now and the FED will most likely raise rates in December 2016 depending on the United States economy.

Over all Caterpillar Inc. is a good business but is being hurt by the strong dollar and the low gas/oil and mining products demand while the world wide economy just drags along.

Management stated at the last earnings release that the economy is slow, the quote follows. "World Economic growth remains subdued and is not sufficient to drive improvement in most of the industrial markets we serve"

Takeaways and Recent Portfolio Changes

Caterpillar Inc. is an investment that should be avoided at the present time and will not be considered by The Good Business Portfolio. The poor past total return and lack of future earnings recovery and growth (in the next 1-2 years) out way the good dividend yield of 3.5% income. Negatives for Caterpillar Inc. is the strong dollar headwind for their foreign operations and the weak worldwide economy.

Trimmed Cabela's (NYSE:CAB) from 6.3% of the portfolio to 5.6% they have received a bid of $65.50 cash for their shares, which to me is a fair price. I want to take a bit off the table in case the deal does not go through. I also would like to deploy the proceeds to increase the dividend paying companies in the portfolio.

Increased Omega Health Investors (NYSE:OHI) from 4.5% of the portfolio to 4.8% of the portfolio, I needed a little more income and OHI will give that to the portfolio. The portfolio will fill in the open portfolio slot with Kellogg (NYSE:K) when cash is available.

Sold some covered calls on Harley Davidson (NYSE:HOG), sold August 50's. If the premium gets to 20% of the sold premium price, I will buy them back with the hope that HOG goes up so I can sell the calls again in the same month for a Double. The HOG price is presently above the strike price and I have moved the calls up and out. On August 10 the portfolio moved the HOG calls up and out to November 52.5's. HOG sales are weak and I will hold the calls and collect the tome value.

The Good Business Portfolio generally trims a position when it gets above 8% of the portfolio. The four top positions in The Good Business Portfolio are, Johnson and Johnson (NYSE:JNJ) is 8.6% of the portfolio, Altria Group Inc. (NYSE:MO) is 7.8% of the portfolio, Home Depot (NYSE:HD) is 7.8% of portfolio and Boeing (NYSE:BA) is 8.1% of the portfolio, therefore JNJ and BA are now in trim position with Home Depot and Altria getting close.

Boeing is going to be pressed to 10% of the portfolio because of it being cash positive on individual 787 plane costs, announced in the 2015 fourth quarter earnings call. For BA from the second 2016 earnings call deferred costs increased $33 Million a small amount and I project positive cash flow from the 787 program in the third quarter of possibly $100 Million. The KC-46A refueling plane has been authorized by the Pentagon for its initial production, this will be a big step to increase Boeing's already high cash flow even more. The contract has still to be awarded, which should be soon. Looking forward I expect Boeing to beat the expected third quarter earnings of $2.52 but will not trim it until it reaches 10.0% of the portfolio. About 1.6 years ago Boeing got above 10% of the portfolio and I trimmed it a little to get it below 10% of the portfolio. Recently on September 21, 2016 Boeing got approval from the United States government to sell commercial planes to Iran, a large sale. Boeing on October 6, 2016 received a $11.7 Billion order from Qatar for 30 787-9 and 10 777-300ER's planes which helps make it easier to meet year end goals.

JNJ will be pressed to 9% of the portfolio because it's so defensive in this post Brexit world.

For the total Good Business Portfolio please see my recent article on The Good Business Portfolio: 2016 Second-Quarter Earnings and Performance Review for the complete portfolio list and performance. Become a real time follower and you will get each quarters performance after the earnings season is over.

I have written individual articles on CAB, JNJ, EOS, GE, IR, MO, BA, Omega Health Investors and HD that are in The Good Business Portfolio and other companies being evaluated by the portfolio. If you have an interest please look for them in my list of previous articles.

Of course this is not a recommendation to buy or sell and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account and the opinions on the companies are my own.

Disclosure: I am/we are long BA, CAB, HD, HOG, JNJ, MO, OHI.

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.