Last update on 2024-06-25

Caterpillar (CAT) - Dividend Analysis (Final Score: 7/8)

Explore the stability and performance of Caterpillar's (CAT) robust dividend policy scored 7/8 by an advanced 8-criteria system. Enrich investments by understanding dividend sustainability.

Short Analysis - Dividend Score: 7

We're running Caterpillar (CAT) against the 8-criteria scoring system to evaluate the performance and stability of a company's dividend policy.

The analysis of Caterpillar (CAT) against an 8-criteria system showed a relatively strong performance with a score of 7 out of 8. Some highlights include Caterpillar's dividend yield being slightly above the industry average, a solid average annual growth rate surpassing 5%, and dividends consistently paid over the past 25 years. However, there are concerns like high volatility in the payout ratio and inconsistent dividend coverage by cash flow. Key metrics suggest overall dividend stability and a robust financial standing, though some caution is advised regarding payout ratio fluctuations and cash flow coverage.

Insights for Value Investors Seeking Stable Income

Considering Caterpillar's consistent history of paying dividends and its extensive shareholder-friendly practices, including share repurchases and a strong average dividend growth, CAT stock can be seen as a worthwhile option for dividend-seeking investors. However, potential investors should be mindful of the volatility in payout ratios and occasional issues with cash flow coverage. Overall, it seems promising but recommends ongoing monitoring of its financial metrics to ensure continued performance.

For those who are interested in delving deeper into the specifics, the subsequent section provides a comprehensive exploration of the criteria.

Dividend Yield Higher than the Industry Average?

Dividend yield measures the annual dividend payment relative to the stock price. It is a commonly used metric to assess the return on investment from dividends and compare it with other investment opportunities.

Caterpillar's current dividend yield of 1.6911% is slightly above the industry average of 1.67%, indicating a potentially more attractive yield compared to its peers. While the yield itself is moderate, the historical data shows fluctuations. Significant peaks, like in 2015-2016 (4.3261% and 4.1514%) can be attributed to dividend hikes coupled with stock price drops. The current yield is lower than past peaks, likely due to a substantial increase in CAT’s stock price (especially from 2020-2023), overshadowing dividend growth. Hence, this trend suggests a robust stock performance given its lower yield amid soaring stock prices, but also signals room for potential dividend growth.

Average annual Growth Rate higher than 5% in the last 20 years?

The Dividend Growth Rate measures how much the dividend payout has increased over time. This represents the growth potential of the dividend income.

Over the past 20 years, Caterpillar (CAT) has had a highly volatile dividend growth rate, with an average dividend ratio of approximately 11.83%. Despite the fluctuations, this figure indicates a robust capability to increase dividends, substantially above the 5% benchmark. This trend suggests a strong and potentially increasing dividend income for long-term investors. However, the large fluctuations, including negative values in some years, indicate periods of potential instability or adjustment. Overall, while the average growth rate is promising, investors should be aware of the year-over-year volatility.

Average annual Payout Ratio lower than 65% in the last 20 years?

The average payout ratio signifies the percentage of earnings paid to shareholders in the form of dividends. A lower ratio suggests sustainability.

The figures provided show inconsistent payout ratios, oscillating significantly across the years. With values as low as '21.2659' in 2006 to exceedingly high such as '-3356.5824' in 2016, the negative overall average of '-110.58649523809524' emphasizes severe volatility. Notably, extreme ratios like '-3356.5824' mask the healthier figures seen in most other years, as most align around the ideal 'below 65%' range. From 2021 to 2023, the company maintained payout ratios from '24.7025' to '36.3053'. Although there was an average payout ratio below 65% for many positive years, high deviations, especially in 2016, make the overall trend concerning.

Dividends Well Covered by Earnings?

Dividends are well covered by the earnings

In general, Caterpillar's dividend payout showed good coverage by the earnings over the long run. Historically, for most years, the Earnings per Share (EPS) have been significantly higher than the Dividends per Share (DPS). For instance, in 2023, the EPS was 20.2409 while the DPS was 5, providing a dividend cover ratio (earnings/dividends) of approximately 4. Overall, having EPS well above DPS is crucial as it signifies the company's strong profitability and capability of sustaining dividend payments, as evidenced in numerous subsequent years post-2008. However, it is critical to note periods such as 2009 and 2016 where there were significant drops pushing the ratio close to 1, which could raise concerns. Nevertheless, Caterpillar demonstrates resilience through recovery reflected in its substantial earnings growth from 2017 onward, suggesting a stable financial position and ensuring dividends are well-covered in more recent years.

Dividends Well Covered by Cash Flow?

Dividends well covered by cash flow indicates the company's ability to sustain dividend payments from its free cash flow. This is important for assessing dividend sustainability and the firm's liquidity.

Reviewing Caterpillar's data from 2003 to 2023, there is noticeable variability in the company's ability to cover dividends with free cash flow. In 2004, the coverage ratio was shockingly negative at -0.087 due to a significant cash flow deficit (-$6.105 billion). This is concerning and indicates a reliance on external funding for dividends that year. More positively, the ratio exceeded 1.0 only twice notably in 2003 (1.63) and 2008 (1.23), showing that in only those years, CAT's free cash flow fully covered dividend payouts with ample excess. In most other years, the ratio hovered well below 1.0. For instance, in recent years like 2020, 2021, and 2022, ratios such as 0.53, 0.49, and 0.47 respectively, suggest only partial coverage. The generally low and inconsistent coverage ratios reflect potential risk for dividend sustainability if free cash flow does not consistently improve.

Stable Dividends Since the Company Began Paying Dividends?

Stability in dividend payments over a lengthy period, like 20 years, is a crucial indicator for income-seeking investors as it demonstrates the company's ability to generate consistent returns for shareholders and its resilience against economic fluctuations.

Reviewing the Dividend per Share of Caterpillar (CAT) over the past two decades, the company shows a clear trend of increasing dividends. Starting from $0.71 in 2003, it has grown incrementally to $5 by 2023. Importantly, there was no year where the dividend per share dropped by more than 20%, which is an excellent indication of its dividend stability. For example, even in years with apparent economic stress, such as 2009 during the financial crisis, the dividend per share remained at 1.68, up from the previous year's 1.56, indicating confidence. Such stable and rising dividends make Caterpillar an attractive option for income-seeking investors, showcasing financial robustness and a shareholder-friendly posture.

Dividends Paid for Over 25 Years?

Dividends Paid for Over 25 Years analyzes the consistency and reliability of dividend payments over a long period. Maintaining dividend payments over 25 years can indicate financial stability and commitment to shareholders.

Caterpillar (CAT) has been paying dividends consistently for the last 25 years, as evidenced by the dividend per share values from 1998 to 2023. There is a clear upward trend in dividend payments, with dividends per share increasing from $0.55 in 1998 to $5.00 in 2023. This long history of dividend payments is a positive indicator of the company's financial stability and shareholder-friendly policies. Additionally, this trend signifies Caterpillar's ability to generate sufficient earnings and maintain a strong cash flow, enabling it to return value to its shareholders consistently. This trend is very good for investors seeking reliable and growing income through their investments.

Reliable Stock Repurchases Over the Past 20 Years?

Reliable stock repurchases refer to a company's consistent buying back of its own shares over a time period. This is important because it indicates the company's confidence in its own stock and can increase shareholder value.

Caterpillar (CAT) has engaged in reliable stock repurchases in multiple years over the past two decades. The total number of shares went from 702.8 million in 2003 to 510.6 million in 2023, reflecting a significant reduction. Out of these years, 13 have been identified as reliable repurchase years, including recent ones like 2020, 2021, 2022, and 2023. This trend shows a long-term commitment to enhancing shareholder value through buybacks. However, the average repurchase rate over the last 20 years was -1.5481%, indicating that the company has substantially reduced its outstanding shares. This commitment to share buybacks is a favorable sign for investors looking at the long-term value appreciation.