It's always nice to be reminded now and then that our country was first founded as an agrarian nation. Without first having a focus on agricultural products, it's unlikely that we as a nation would be anywhere near where we are today. Obviously we've moved far beyond those times, but it's clear that agrarian products and the companies that aid in their development still play a crucial role even today.
With that said, let's take a look at a few of the companies that provide the tools and machinery that play a large role in facilitating agricultural and urban development. What you'll find is that while many of these companies have an average dividend yield, they've more than made up for it with the rapid rate of dividend increases of late. Below I've outlined two companies that stand out as clear havens for income investors and another company that could be setting up investors for a bumpy ride.
Caterpillar, the world's largest construction and mining equipment manufacturer, is one example of why it's best to be king. Being the largest company in the sector allows it to have earnings visibility that many of its peers often don't have, as well as the ability to weather economic downturns well because of its diverse revenue stream.
Growing both organically and through acquisition (the company recently purchased Bucyrus), Caterpillar has managed to get revenue and operating margin back to pre-credit crisis levels based on trailing-12-month figures. This isn't bad considering sector rivals Terex
With free cash flow of $4.5 billion, it comes as no shock to me that Caterpillar has raised its dividend for 18 consecutive years. Having shareholder interests in mind, Caterpillar's dividend has seen annual growth of 10.2% over the past 10 years. At a yield of 2.3%, you aren't going to retire off Caterpillar, but this dividend and the underlying stock price have shown incredibly strong growth recently, which leaves me little reason to believe this won't continue into the future.
This company is the answer to the question, "If everyone is cutting back on spending in Europe, who is still going to show growth?" Deere, which is the largest farm equipment manufacturer in the world, shocked investors in its most recent report by forecasting 10% to 15% revenue growth from its European segment despite very tough spending cutbacks across most of the region. Now that 35% of its revenue comes from international sources, like Caterpillar, it's able to withstand wild economic swings with minimal impact to its bottom line.
It also doesn't hurt that Deere is a considerably more efficient company than many of its peers. Relative to operating margin, Deere blows both Kubota
At 2.4%, Deere's dividend isn't exactly going to knock income investors over -- but examining its recent history of growth just might. Deere's quarterly payout has more than doubled in the past five years and is up 273% since 2003. Does the company care about its shareholders? Yeah, I'd say so. This is just another reason you can trust Deere to continue to deliver for shareholders over the long term.
When do record results merit a warning label? When more than a quarter of a company's revenue is tied to Europe. Thus is the plight of Alamo Group, a manufacturing supplier of everything from mowing equipment to vacuum trucks.
Last quarter the company reported that $46 million of its $161 million in revenue came from Europe, with sales to governmental agencies having a negative impact on results. Likewise, the company noted that even in its North American segments, weak government spending derived from cost-cutting measures are impacting its sales potential. As you'll notice, countries worldwide are tightening their belts, which could spell trouble for a small-cap company like Alamo despite its relatively strong results.
More troubling than the cloudy revenue picture is the company's dividend. Alamo's current yield of 1.1% isn't horrible (though it's not great, either), but its history of raising its dividend is highly questionable. The company's payout ratio of 11% seems low, especially considering that it hasn't raised its dividend in 12 years! Tight operating margins could be one reason for the lack of a dividend increase, as could be its history of erratic cash flow. Either way, it's evident that Alamo isn't going to increase its dividend anytime soon, which makes casting this company aside as an "avoid" all the more easy.
Sometimes the biggest names in a sector really are the answer. I know it may not seem like an epiphany, but Caterpillar and Deere are consistently delivering for shareholders while Alamo is showing all of the warning signs of a company that may not.
Seeking more input? Johnny Five encourages you to check out The Motley Fool's free report "13 High-Yield Stocks to Buy Today" as well as to add Caterpillar, Deere, and Alamo Group to your watchlist so you can keep up on the latest news from the sector.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that will keep you from stepping in manure.