Is Caterpillar Adding Value to its Shareholders?

Caterpillar is facing tough headwinds in its resource industries sector. As the mining industry is not looking bright for some more quarters, Caterpillar’s financial strength is under scrutiny.

Jul 22, 2014 at 4:55PM

Caterpillar (NYSE:CAT), the global titan in heavy equipment machinery, has truly remained a dividend paying stock for the last twenty years. Though the company has been experiencing tough times from the last few quarters, it has continuously rewarded the investors through dividends and buybacks.

In the words of legendary Warren Buffet – "Cash combined with courage in a time of crisis is priceless." This saying is a perfect fit for Caterpillar which has maintained its cash reserves even during crisis periods to deliver value to the investors. Having said this, for a company prone to market cyclicality, a few issues do arise. Can the company sustain this trend in the coming future? Is the company in a position to sustain its dividend? What are its key financial strengths that aid in adding ultimate value to the shareholders? Let's assess the company's key financial metrics to get to the final answers.

Revenue and earnings growth
Caterpillar's revenue rose substantially year over year from 2009 until 2012, but in the last year the revenue plunged due to the slump in the mining industry. The decline affected revenue from Caterpillar's resource industries segment (which caters to mining), as sales of high margin mining equipment took a severe hit. However, the consistent performance of the construction and power segments in 2013 averted the dramatic revenue slide. 

There lies the beauty of Caterpillar's business-it operates in three diverse segments, and one segment's weakness can be offset by strength in other segments. And this is the crux of the story if we look back at the past financials of Caterpillar. In 2013, year over year total sales dropped by 16%, but this nosedive could have been higher if there was no diversification of business. 

Analysts estimate that despite a lag in the mining industry, the company's revenue will grow at 1% in fiscal 2014 and 5.9% in fiscal 2015. This is primarily attributable to improved construction equipment sales in North America and China.


Source: Data from Morningstar; chart made by author

The earnings of Caterpillar have improved over the past years. Though it dipped in 2013 due to compressed margins, in the first quarter of 2014 earnings rose 10% to $1.44 a share from $1.31 reported in the similar quarter last year. Reduction of research and administrative expenses by $1.2 billion, and employee headcount by 9,700 in the last year positively affected the first quarter earnings of this fiscal year. 

Bloomberg analysts were expecting earnings per share of $5.81 for this full year. These projections hinged on an anticipated construction boom in the global markets as construction equipment demand is projected to expand at a CAGR of 7.3% from $102.3 billion in 2010 to around $145.3 billion by 2015.  


Source: Data from Morningstar; chart made by author

Steady cash flow generation
Free cash flow is an important performance indicator as dividends get distributed, repurchases are initiated and new investments are made from this cash component.

While Caterpillar has consistently generated free cash, the company has experienced major swings year to year. True, the company has been able to generate positive cash flow every year for the past five years, however small, even in 2012 when the company's poor inventory management ate away at free cash flow generation.


Source: Data from Morningstar; chart made by author

Stable dividend payout
The payout ratio gives an idea on how well the company earnings support the dividend payments. A stable dividend payout ratio reflects a solid dividend policy maintained by the management which helps in creating incremental value for the shareholders. 

Caterpillar has been a stable dividend yielding stock and its quarterly dividend has increased gradually from $0.0875 per share in 1996 to $0.60 per share by 2013. In this fiscal first quarter the company has declared a dividend payout of $0.60 per share which convinced investors perturbed with the dwindling mining industry prospects. The company has also maintained regular dividend payout on an annual basis over the past years. The company has also announced an interim dividend in June this year which is a 17% hike to 0.70 per share.


Source: Data from Morningstar; chart made by author

Caterpillar has been modest in its dividend payout for the previous ten years averaging to around 26.85%, in terms of the payout ratio.  Caterpillar's focus is more on steady regular payouts than on high payouts. Thus it has always rewarded its shareholders' with dividends even when the earnings were softer. As Caterpillar maintains stable payouts almost every quarter, it can further exercise control over its future dividend payouts. From 1998 till date, the cash dividend paid to the investors has more than tripled.

The company is not restricted to dividend payouts alone; it also periodically repurchases stock. Recently it has entered into an agreement for accelerated stock repurchase of $1.7 billion. This is like the cherry on top of the sundae for its investors.

Foolish takeaway
Caterpillar's management has been prudent while adding value to its shareholders through dividends and stock repurchases. The stability in cash flow, healthy dividend record and regular stock repurchase program augurs well for the company. With this track record and a stable financial outlook, shareholders can stay calm in the upcoming quarters as well.

You can't afford to miss this
"Made in China" -- an all too familiar phrase. But not for much longer: There's a radical new technology out there, one that's already being employed by the U.S. Air Force, BMW and even Nike. Respected publications like The Economist have compared this disruptive invention to the steam engine and the printing press; Business Insider calls it "the next trillion dollar industry." Watch The Motley Fool's shocking video presentation to learn about the next great wave of technological innovation, one that will bring an end to "Made In China" for good. Click here!

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers