"A stock dividend is something tangible -- it's not an earnings projection; it's something solid, in hand. A stock dividend is a true return on the investment. Everything else is hope and speculation."
-- Finance writer Richard Russell
Caterpillar's (CAT 1.24%) dividend is one thing investors can hold in high regard, even though just about everything else about the company has been tough sledding over the past four years. Sales and revenue are expected to decline to nearly $48 billion this year, down a staggering $20 billion below its peak, or a decline of roughly 31%. Furthermore, management expects sales and revenue to fall another 5% next year, and if that happens, it will be the first time in the company's 90-year history that sales will have declined for four consecutive years. Caterpillar's net income has seen drastic drops as well: The company's trailing-12-month net income barely tops $3.5 billion, which is far below 2011 and 2012 levels of $4.9 billion and $5.6 billion, respectively.
With its top and bottom lines in decline, how safe is Caterpillar's dividend? Let's take a look at its dividend, its history of payouts, and why investors should feel pretty safe about the dividend going forward.
Dividend info
Caterpillar's dividend currently sits at $0.77 quarterly per share, for an annual rate of $3.08 per share, which equates to a yield of 4.42%. Management has shown that it can consistently increase its dividend and avoid cuts over the decades.
Chart by author. Data source: Caterpillar.
Moreover, management noted in its Q3 presentation: "The dividend is a priority for Caterpillar ... We've paid a quarterly dividend every quarter since 1933 and have increased the annual dividend every year for over 20 years. We did not reduce the dividend during the 2008/2009 financial crisis."
But as we all know, talk is cheap. Adjusting for management's new guidance, Caterpillar's dividend payout ratio is creeping toward 80% when including restructuring costs, which drags down profit per share in the equation. Excluding restructuring costs, Caterpillar's dividend payout ratio is likely to be slightly above 60% for 2015.
As Caterpillar's payout ratio continues to climb higher, thanks to its declining profits and increasing dividend, should investors be worried about management pausing dividend increases -- or (gasp!) even slashing the dividend?
The short answer is no, thanks to Caterpillar's ability to consistently generate cash flow. The company's machine, energy, and transportation cash flow has posted three out of its best four years in history since 2010. That's helped increase Caterpillar's pile of cash, as you can see below.
Chart by author. Data source: Caterpillar's quarterly press releases.
Investors also need to consider that Caterpillar's balance sheet remains strong, with its machine, energy, and transportation debt-to-capital ratio declining from 57.5% at the end of 2008 to 37.4% at the end of the third quarter.
Furthermore, management has focused on cutting costs, and it predicts capital expenditures will be cut in half for 2015 compared to 2012 levels -- and that's a trend it expects to hold in 2016 as well. It also foresees slashing about $1.5 billion from annual costs by 2018, with about half of that level expected in 2016.
Ultimately, Caterpillar's dividend is very safe with the current cash pile, cost-cutting measures taking effect, and strong balance sheet. Moreover, as Caterpillar is within a few years of becoming a Dividend Aristocrat -- a company that has increased its dividend for at least 25 consecutive years -- you could practically bet money that it would tone down its share repurchases before it pressed the pause button on its dividend hikes.
