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Last week Caterpillar (CAT) made the headlines every day starting with their presentation at MINExpo at which they lowered their 2015 EPS forecast to $12-18/share from $15-20 previously. This forecast did not include a worldwide recession. Shares of CAT started to fall. On Tuesday the contagion spread to Joy Global (JOY), Terex Corp (TEX), and Manitowoc (MTW). This news set up Friday's announcement by CAT that they would be raising prices on most of their machines by up to 3% in January, as well as a 7% emissions related increase on select models. (Headlines from Seeking Alpha)

Caterpillar's price dropped from a high of 91.72 on Monday to a close of $86.04 (-6.19%) on Friday. I had previously entered my limit order at $90, but picked up my shares at $88.56 when caught in the downdraft.

(click to enlarge)

Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives worldwide.

The chart below shows the cyclicality of the companies stock.

(click to enlarge)

Caterpillar is a Dividend Contender with 19 years of increasing dividends, a current yield of 2.39% and a 5-yr dividend growth rate of 10.4% (data from David Fish's CCC charts). The current P/E ratio is 9.62. The projected 5 year earnings per share growth rate is 12.6%, with next year's earnings per share growth projected at 9.25%. I believe the stock is fairly valued at $97.23 per share.

In order to inform myself of a 5-yr dividend reinvestment of this holding, I prepared a spreadsheet:

StockDate of reinvestDiv Rate# SharesDividendDrip price# Shares purTotal ValueCurrent Yield
Totals  147.23$1,186.82 18.23  
 07/18/12$0.52146.31$76.08$82.52.92$12,149.752.52%
 04/19/12$0.46145.69$67.02$107.36.62$15,708.061.71%
 01/18/12$0.46145.05$66.72$104.26.64$15,189.421.76%
 10/20/11$0.46144.26$66.36$84.26.79$12,221.742.18%
 07/18/11$0.46143.65$66.08$107.80.61$15,551.261.71%
 04/20/11$0.44143.07$62.95$108.28.58$15,554.141.63%
 01/18/11$0.44142.41$62.6696.23.65$13,767.241.83%
CAT10/21/10$0.44141.62$62.31$78.89.79$11,235.112.23%
 07/16/10$0.44140.66$61.89$63.94.97$9,055.502.75%
 04/22/10$0.42139.79$58.71$67.51.87$9,495.762.49%
 01/15/10$0.42138.82$58.30$60.12.97$8,404.022.79%
 10/22/09$0.42137.83$57.89$58.74.99$8,154.142.86%
 07/16/09$0.42136.16$57.19$34.151.67$4,706.964.92%
 04/16/09$0.42134.43$56.46$32.711.73$4,453.715.14%
 01/15/09$0.42133.01$55.87$39.391.42$5,295.254.27%
 10/16/08$0.42131.71$55.32$42.371.31$5,635.773.97%
 07/17/08$0.42130.94$55.00$71.83.77$9,460.552.34%
 04/17/08$0.36130.34$46.92$78.59.60$10,290.721.83%
 01/17/08$0.36129.60$46.66$62.47.75$8,142.642.31%
 10/18/07$0.36129.00$46.44$77.66.60$10,064.581.85%

The price cyclicality can be seen from this table. In addition, it also shows that the growing dividend has purchased more shares during the downturn of 2008-2009 than were purchased at other times providing a form of dollar cost averaging. The $10,000 originally invested provided $12,149.75 after 5 years of quarterly reinvestment or 3.97% per year. These results are graphed below:

(click to enlarge)

Several authors on Seeking Alpha have written compelling articles recently concerning this current buying opportunity (found here, here, and here).

Conclusion: I bought Caterpillar because it is the market leader in the industrial sector and my portfolio was underweight industrial stocks. Cyclical stocks, like CAT make their money when the global economy is hot. At present, there is much gloom and doom all around the world and it appears that we are in for a lengthy global recession. There are signs in many countries including China that show we are beginning to turn the corner on this business cycle. China has announced large infrastructure spending. The US is also in the midst of infrastructure spending on bridges, roads, and railroads. Even if the US enters a recession in 2013, global infrastructure purchases should buoy Caterpillar's stock price. The important thing to note is that Caterpillar will continue to increase the dividend, even as the price of the stock fluctuates. Thus, a growing income stream will be afforded.

Source: Buy Caterpillar Now, At The Bottom Of The Business Cycle