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This Blue Chip Dividend Aristocrat Just Boosted Its Payout by 8%

By Neha Chamaria - Updated Jun 10, 2021 at 11:00AM

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Caterpillar increased its dividend sooner than expected, backed by strong cash flows.

Caterpillar (CAT 0.97%) today announced an 8% increase in its dividend, putting to rest investor concern about whether the industrial giant would retain its Dividend Aristocrat status. In fact, the raise has come sooner than expected.

During its first-quarter earnings conference call, management hinted at a potential dividend increase only later this year, even as it chose not to provide any guidance for 2021. Its dividend increase, therefore, should come as a relief for investors.

Caterpillar joined the elite Dividend Aristocrat group in 2018 when it increased its dividend for the 25th straight year. It boosted the payout again in 2019, but investors feared the worst when the blue chip stock suspended share repurchases in April 2020 and maintained its dividend through the year.

Two persons smiling as they count money.

Image source: Getty Images.

It was therefore imperative for Caterpillar to increase its dividend this year to remain a Dividend Aristocrat. (Caterpillar paid out a higher dividend-per-share amount in calendar year 2020 because of a raise in July 2019, so it remained an Aristocrat.) Its latest hike of 8%, although much smaller than its 2019 dividend increase of 20%, marks its 27th consecutive annual increase and reaffirms Caterpillar's commitment to prioritize dividends "through all economic cycles" and return the bulk of its free cash flow to shareholders, as management has stated time and again.

"Our strong balance sheet and liquidity position make it possible for us to continue our long history of increasing our dividend and returning value to shareholders," CEO Jim Umpleby said while announcing today's dividend increase. He also highlighted how Caterpillar is generating "higher free cash flow through the cycles."

Indeed, Caterpillar has generated free cash flow of nearly $5 billion in the past 12 months, which is its highest in the last five years. In the first quarter, revenue jumped 12% on higher sales volume, and its operating margin came in at 15.3% compared with 13.2% in the year-ago quarter.

Caterpillar shares currently yield 1.7%, and the stock has gained nearly 30% year to date, largely on stronger commodity markets and expectations of an infrastructure bill under President Joe Biden that should boost demand for the world's largest construction-equipment manufacturer.

Neha Chamaria has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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