Low Yields And Caterpillar

| About: Caterpillar Inc. (CAT)

Summary

Caterpillar currently has a yield of more than 4%.

With yields on several government bonds in negative territory, high-quality dividend paying companies are an attractive proposition.

Caterpillar's stellar record in dividend payments and high yield make it an obvious choice.

Although several of its end markets continue to struggle, Caterpillar (NYSE:CAT) has had a decent year so far. Year-to-date, CAT is up more than 11%. From its January lows, the stock is now up almost 30%. Earlier this month, CAT maintained its dividend and at current levels, the stock is yielding more than 4%. I have noted in previous articles that CAT's dividends are sustainable and therefore income investors should continue to hold on to the stock. The 4% yield and an excellent track record when it comes to dividend payments, in fact, make CAT one of the top picks for investors chasing yield in the present environment. Indeed, it is one major reason to hold on to CAT despite the state of many of its end markets.

The Challenging Environment

Earlier this year, Caterpillar lowered its financial guidance for 2016. This was anticipated after CAT reported weak first-quarter results. While some of the company's end markets such as oil and construction are showing signs of improvement, the overall environment remains challenging. Even the recovery in oil prices does not bring immediate benefits to CAT. While the worst maybe over for the company, we are not likely to see revenue growth in the next two years.

Indeed, this was noted by CAT when it reported first-quarter results in April. The company noted that it is seeing a few positive signals in some parts of its business such as construction, however, other parts of the business remain challenged.

Hold on to CAT

For 2016, Caterpillar now expects its revenue to be between $40 billion and $42 billion. This would mark yet another year of revenue decline for the industrial giant. The consensus forecast for 2016 sales is $40.17 billion. For 2017, sales are expected to decline once again. The consensus forecast is for sales of $39.68 billion. Despite the gloomy outlook, it is worth holding on to CAT. And here is why.

I have noted in my earlier articles that CAT has an excellent track record when it comes to dividend payments. This, combined with the current yield of 4%, makes CAT an attractive proposition for yield-hungry investors.

The Negative Yield Environment and CAT

Yields on German sovereign bonds are now in negative territory. While this is partly due to Brexit fears, the European Central Bank's (ECB) quantitative easing is also responsible for the negative yields. So even if the vote on Thursday is in favor of staying in the European Union (EU), one can expect the negative yield environment to prevail. Yields on Swiss government bonds are also in negative territory. In the U.S., the Federal Reserve last week cut its rate forecast for 2017 and 2018. Meanwhile, yields on Treasury bonds recently hit a four-year low. More important, the low yield environment could persist. The ECB's bond purchase program is much more comprehensive than the Fed's three quantitative easing programs. The ECB is even buying corporate bonds, pushing yields down in several sectors. Given the present environment, yield-hungry investors will move into high-quality dividend paying companies, especially given the fact that many of them currently offer attractive yields.

Given CAT's stellar track record in dividend payments and its 4% dividend, it is an ideal pick for investors chasing yields. While the company's payout ratio is well above its 10-year average, it had a higher payout ratio in 2009 when the financial crisis was at its peak and CAT's business outlook was uncertain.

Disclosure: I am/we are long CAT.

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.

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