Will Caterpillar Bulldoze My Portfolio Higher?

| About: Caterpillar Inc. (CAT)
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It's time to add to my dividend retirement portfolio and I am finding it somewhat "slim pickings" out there. With the overall stock market reaching new highs almost daily, it's hard to locate solid companies that are not overvalued (a P/E of 15 or less). After playing with stock screens, reviewing and re-reviewing the Dividend Champions list and reading commentary on Seeking Alpha, I've come up with a list of stocks that might be appropriate for my dividend portfolio. The portfolio has the following characteristics:

Item Current Goal
Number of Stocks 7 10
Portfolio Beta .81 <1.1
Yield on Cost (%) 4.8 >4
Weighted 5yr Div Gr Rate (%) 12.4 >5

With this next purchase, I would like to bump up the yield, but still maintain a low beta. The stocks I am considering are the following:

Stock Dividend Yield (%)* Beta*
Realty Income Corp (NYSE:O) 4.2 (monthly) 0.5
Plains All American Pipeline (NYSE:PAA) 3.9 0.6
Conoco Phillips (NYSE:COP) 4.2 1.1
Caterpillar (NYSE:CAT) 2.3 1.8

*Courtesy of Yahoo

Of course each of these stocks has positives and negatives which boil down to a series of (hopefully) calculated risks that can drive the final choice. Can the company maintain the dividend? Will the company be able to grow its earnings, increasing the market value? Is the company currently overvalued? To answer these questions, I've put together a table listing more of each company's metrics:

Stock Price Target P/E Recom. EPS Gr.(%) (last 5 yrs.) DGR (%) (last 5 yrs.) # of Red flags
O 55.09 63.36 76 Buy 1.3 1.4 1
PAA 57.98 64.00 24 Buy 12.0 5.2 0
COP 63.31 64.00 11 Buy -3.0 13.1 1
CAT 87.67 109.00 12 Buy 10.3 8.4 0

(Table data courtesy of Finviz, S&P Stock Report, The Street Ratings, U.S.Dividend Champions list; stock price is as of 5/17/13.)

Even though I do find receiving dividends each month a plus, Realty Income Corp is disqualified based on its low growth rate. Conoco Phillips, has one red flag and is near its estimated target price. That leaves Caterpillar and Plains All American Pipeline, both of which are on the Dividend Contender's list. Which company to choose? Their pros and cons are:

Stock Pros Cons
PAA EPS Growth, Div Yield, Low Beta High P/E
CAT EPS Growth, Low P/E, Div Growth Lower Div Yield, High Beta

A recent analysis by Chuck Carnevale illustrates the important effect of capital appreciation and the time-of-purchase-valuation on ROI. With this in mind, Caterpillar might be the winning choice.

What would be the effect on my portfolio if I bought Caterpillar compared to buying Plains All American? A hypothetic purchase of equal dollar amounts would result in the following:

Item Current Buy CAT Buy PAA Goal
No. of Stocks 7 8 8 10
Portfolio Beta .81 .93 .79 <1.1
Yield on Cost (%) 4.8 4.5 4.7 >4
Weighted 5yr DGR (%) 12.4 11.9 11.5 >5

In both cases the yield has dropped, but the other goals are met. So based upon these metrics, there isn't a clear winner.

More combing through analyst's reports and the Dividend Contender's list revealed that the payout ratio of PAA is over 95% compared with 28% for Caterpillar. Additionally both the Tweed Factor and the Chowder Rule are higher for Caterpillar. PAA's high payout ratio makes me wonder if the company can continue increasing the dividend.

Then I went to Caterpillar's website and perused all of the cool equipment that it manufactures and sells throughout the world: Backhoes, trucks, excavators, dozers, loaders, drills, to name a few of the numerous machines that Caterpillar manufactures.

In the end, the product sold me. I'm going with Caterpillar.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CAT over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.