Up to date on February twenty fifth, 2021 by Bob Ciura
Every year, we individually evaluate every of the Dividend Aristocrats, a bunch of 65 shares within the S&P 500 Index which have raised their dividends for at the very least 25 consecutive years.
To make it on the record of Dividend Aristocrats, an organization should possess a worthwhile enterprise mannequin with a precious model, international aggressive benefits, and the power to face up to recessions. Because of this the Dividend Aristocrats can proceed to lift their dividends in troublesome years, such because the 2020 coronavirus pandemic.
With this in thoughts, we’ve got created a listing of all 65 Dividend Aristocrats. You may obtain your free copy of the Dividend Aristocrats record, together with essential monetary metrics comparable to price-to-earnings ratios and dividend yields, by clicking on the hyperlink under:
Caterpillar Inc. (CAT) joined the Dividend Aristocrats record in 2019. Much more spectacular is the truth that Caterpillar operates in a extremely cyclical {industry}, which usually prevents corporations from attaining lengthy histories of annual dividend will increase.
Nevertheless, Caterpillar’s administration group has confirmed its dedication to returning money to shareholders even via the inevitable ebbs and flows of the enterprise over time. Caterpillar additionally has sturdy aggressive benefits that enable it to lift its dividend every year, even via downturns within the international economic system.
Enterprise Overview
Caterpillar was based in 1925, and in the present day competes within the manufacturing and promoting of building and mining gear. The corporate additionally manufactures ancillary industrial merchandise comparable to diesel engines and fuel generators. Caterpillar is a large-cap inventory with a market capitalization of ~$120 billion, making it one of many largest industrial shares on this planet.
Industrial producers struggled in 2020 as a result of coronavirus pandemic, which suppressed international financial exercise. Caterpillar can also be particularly uncovered to the vitality and mining industries which have additionally struggled as a consequence of weak commodity costs.
On January twenty ninth, 2021 Caterpillar reported This autumn and full 12 months 2020 outcomes for the interval ending December thirty first, 2020. For the quarter, the corporate reported income of $11.2 billion, representing a -15% decline in comparison with This autumn 2019. Development Industries, Useful resource Industries and Vitality & Transportation posted declines of -10%, -9% and -19% respectively.
The Vitality & Transportation phase struggled probably the most within the fourth quarter.
Supply: Investor Presentation
This led to weak total outcomes for Caterpillar. Fourth-quarter adjusted earnings-per-share equaled $2.12 for the fourth quarter, in comparison with $2.71 in the identical interval the earlier 12 months.
For the 12 months, Caterpillar generated income of $41.7 billion, down-22% in comparison with 2019. The decline was pushed by decrease end-user demand and sellers lowering their inventories by $2.9 billion in 2020 amid the COVID-19 pandemic. Adjusted earnings-per-share equaled $6.56 versus $11.40 in 2019.
Progress Prospects
Caterpillar is carefully tied to international financial development, in addition to commodity costs. Its prospects extract sources from the earth in addition to construct and assemble all kinds of buildings, so financial development is essential to fund that improvement. This results in some pretty excessive cyclicality in Caterpillar’s outcomes, which then sees the inventory swing wildly between extremes of the sentiment scale.
The coronavirus pandemic weighed closely on the corporate final 12 months, however buyers are hoping that the worldwide financial restoration continues in 2021. This may be the perfect alternative for Caterpillar’s fundamentals to enhance.
Additional, Caterpillar’s personal cost-cutting measures have pushed working margins increased for years and whereas the majority of the positive factors could have been realized, we see additional potential for expense reductions to positively increase earnings.
We count on earnings to enhance for 2021, however nonetheless are available in effectively under the pre-pandemic peak. We’re forecasting $7.50 in earnings-per-share for 2021 to go together with an 8% development fee over the intermediate time period. This displays each some warning with regard to the cyclical nature of the enterprise and Caterpillar’s means to bounce again when demand returns.
Aggressive Benefits & Recession Efficiency
Aggressive benefits in industrial functions might be troublesome on condition that for many functions, there are opponents that make largely related merchandise. Nevertheless, Caterpillar has constructed itself into one of many largest gamers in profitable finish markets comparable to building, vitality, and mining over time.
Its international presence affords it some diversification of income by phase and {industry}, but additionally geographically, which has served it effectively lately. Its scale additionally provides it the power to leverage down variable prices per unit, which boosts margins.
Nevertheless, Caterpillar is definitely not immune from recessions as slowdowns within the international economic system are usually accompanied by decrease commodity costs and slowing building spending. These components took a significant toll on Caterpillar’s backside line throughout the Nice Recession, as earnings have been devastated, if solely briefly.
Caterpillar’s earnings-per-share throughout the Nice Recession are under:
- 2007 earnings-per-share of $5.32
- 2008 earnings-per-share of $5.71 (7% enhance)
- 2009 earnings-per-share of $1.43 (75% decline)
- 2010 earnings-per-share of $4.15 (190% enhance)
Whereas Caterpillar definitely felt the ache from the Nice Recession, its earnings rebounded pretty shortly and it reclaimed its pre-recession earnings-per-share quantity in 2011. Caterpillar skilled a milder, but nonetheless important, decline in earnings-per-share final 12 months as a result of coronavirus pandemic. Due to this fact, it’s clear that Caterpillar is uncovered to recessions as a result of financial bellwether nature of the heavy equipment {industry}.
Valuation & Anticipated Returns
Caterpillar’s present price-to-earnings ratio is 29.5, based mostly on 2021 anticipated EPS of $7.50. It is a very elevated valuation degree for Caterpillar. Since 2011, shares of Caterpillar have traded with a mean P/E ratio of about 15. We consider 15 is an inexpensive honest worth estimate for Caterpillar, given its cyclical enterprise and vulnerability to recessions.
Durations of cyclicality are regular for Caterpillar in the case of the valuation, and in the present day, we’re definitely seeing a swing increased within the value of the inventory relative to earnings. This might considerably scale back future returns; if the P/E a number of declines from 29.5 to fifteen over the following 5 years, it might decrease annual returns by 12.7% per 12 months in that timeframe.
The opposite unfavourable side of shares with elevated valuations is that in addition they have decrease dividend yields. As Caterpillar’s share value has soared prior to now 12 months, its dividend yield has declined to 1.9%. Dividends and earnings-per-share development (anticipated at 8% per 12 months) will add to shareholder returns, however the excessive overvaluation of the inventory is a excessive hurdle to clear.
Based mostly upon the components mentioned above, we see whole returns of -2.8% per 12 months. Damaging anticipated returns makes the inventory a promote in our view on the idea of overvaluation.
Ultimate Ideas
Caterpillar inventory continues its spectacular rise, having elevated over 70% prior to now 12 months as of this writing. On the identical time, the corporate struggled mightily final 12 months, with income and earnings-per-share declining considerably as a result of coronavirus pandemic. It seems buyers have priced in a speedy restoration in 2021 and past, however this makes the inventory considerably dangerous in our view.
Caterpillar has an industry-leading model and a constructive long-term development outlook, however we really feel the inventory has merely grow to be overpriced as a result of huge rally over the previous 12 months. With a weak anticipated future return, we fee the inventory a promote. Buyers ought to await a major decline within the share value.
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