Caterpillar (CAT), the global leader among mining and construction equipment manufacturers, featured prominently in the news recently for a few important reasons. On Monday, Sept. 24, Caterpillar announced a reduction in its profit and growth forecasts from $15-$20 earnings per share announced previously to $12-$18 for the next three years. Concerns regarding global economic slowdowns and the eurozone debt issue were among reasons cited by CAT's CEO. On Friday, Sept. 28, Caterpillar issued a press release that stated the company will increase the prices of most of its equipment by about 3% starting next January. In the same release, CAT announced a 7% price increase for selected machines in some regions based on emissions-related issues.
As expected, the news of lowered expectations sparked a downward trend in the prices of CAT stock, a trend that has continued. In fact, Caterpillar shed about 8.5% of its original price of $91.72 per share since the announcement. While that may remain minimal, the effect is escalating to other mining and equipment stocks like Terex (TEX), Manitowoc (MTW), and Joy Global (JOY).
Cheering News on CAT's Growth Prospects and Dividend Stability
It is understandable that investors are questioning where Caterpillar is heading considering the recent announcements. Despite lowering profit and growth forecasts, CAT's CEO is optimistic that the company will remain ''attractively profitable'' and will also ''maintain [the] dividend'' going forward. Although forecasts on profitability have been lowered, the company remains on course to ensure shareholders continue to enjoy the robust dividends the company has been paying out regularly for the past 19 years.
What does that mean for your investment portfolio? You will gain higher dividend yields per share.
If you opt to buy Caterpillar now that the stock is dropping, you will benefit from higher dividend yields since the company has promised to keep up with its yearly improved dividend payouts. For a dividend growth stock like CAT, dividend yield fluctuates when the stock price changes either way. You benefit more when the stock drops as the dividend yield will inch up in each case. Also, you will grow a stream of income from increased dividend payouts, while waiting to make a killing on capital gains once the business environment becomes more favorable and CAT makes price gains again.
CAT's Business Prospects, Valuation Metrics, and Outlook
The global business environment remains bright for Caterpillar despite the economic slowdown. China and the U.S. are two of the most powerful economies that will continue to benefit Caterpillar, because CAT is a market leader within its sector compared to Deere and Company (DE) and Cummins (CMI). The two top economies must always spend on developing their infrastructures like roads, bridges, and railroads. Oftentimes, such spending on the development of infrastructures runs into the hundreds of billions of dollars.
Presently, Caterpillar trades at a price/earnings ratio of about 9.47, a forward price/earnings ratio of 8.40, and earnings per share of 8.94. Taking a closer look, Caterpillar is cheaper when compared to the competitors within its sector and the S&P 500. Many investors have lowered their expectations on Caterpillar since the company lowered its future profit forecasts. If we want to follow the trading advice of experienced stock traders like Warren Buffett, we will be ''greedy when everyone is fearful and be fearful when everyone is greedy.'' This is surely the time to be greedy by going big on CAT because the positive signs are there:
- The prospect of increases in spending on infrastructures by the world's top economies.
- CAT's superior products, cutting-edge services, and strong fundamentals.
With a 2.4% dividend yield, Caterpillar is the best growth stock in its industrial sector in comparison to its closest competitors like Deere (2.3%) and Cummins (2.2%). While waiting to reap appreciable capital gains when shares of CAT go up in price, value investors will benefit from the improved and steady flow of dividend payouts if they add more of the stock at this time.