This great industrial dividend stock maintains a steady dividend even in the worst of times
Dividend stocks and the resulting passive income are undoubtedly very interesting for investors. But there is a big risk involved - because no one can guarantee that a dividend stock will pay out forever. But history can tell us a lot, and if a payout is as stable as it is for our company today, there's a good chance it will continue to be.
I'm talking about Caterpillar $CAT+1.6%. One of the industry's best-known giants.
Caterpillar is one of the world's largest manufacturers of heavy equipment, engines and industrial equipment. The company is highly trusted by customers around the world for its quality products and its ability to meet the specific needs of customers in various industries.
Caterpillar
CATIt manufactures a wide range of products including dozers, loaders, motor generators, pumps, motors and power generation equipment. Its machines are mainly used in construction, mining, agriculture and industry. Caterpillar operates in virtually every major geo-economic region of the world and attracts customers for its products from major international companies in these industries.
The company focuses on innovation across its portfolio. It invests a large amount of research and development in more environmentally friendly technologies such asalternative fuel systems, hybrid engines and efficiency-enhancing equipment. This focus is in line with long-term global trends.
CAT is an example of a resilient global corporation with a very strong brand, a long-term orientation, the ability to grow even in adverse market conditions and a long history of paying dividends to shareholders. It thus represents a stable investment opportunity for long-term investors despite the current economic challenges.
Sector
Caterpillar operates in the heavy equipment and construction sector, which is closely linked to the global economy. With its machinery and equipment.
The heavy equipment and construction sector is potentially resilient to economic cycles, as even in times of recession there remains a level of activity in critical infrastructure. On the other hand, it depends on overall economic growth, especially in emerging economies. However, companies in this sector are characterised by their ability to grow even in difficult times, thanks to their strong brands, broad product portfolios and global presence.
Competition
Caterpillar faces competition from a number of large global companies in the heavy equipment and construction sectors. Major competitors include:
- Komatsu $KMTUY - Japanese company Komatsu is one of the largest heavy equipment manufacturers in the world. It competes with Caterpillar primarily in the areas of mining equipment, bulldozers, loaders and dump trucks.
- Volvo Construction Equipment $VLVLY - Swedish Volvo competes strongly with Caterpillar with a full range of heavy equipment for the construction and mining industries, including loaders, dozers, excavators and large capacity trucks.
- Hitachi Construction Machinery - Another Japanese competitor, Hitachi offers a wide range of heavy equipment and also competes substantially across Caterpillar's product portfolio. Hitachi's products are primarily attractive due to their lower price and higher operating cost savings.
- John Deere $DE+0.7% - John Deere's U.S. competitor, known primarily for its tractors, also offers a wide range of construction equipment that competes with Caterpillar products. The company leverages its strong brand and focus on farmers as key customers.
Stability
With its reasonable valuation, relatively high yield, strong global position and good growth, Caterpillar seems to be a really attractive proposition. Earnings are expected to grow 15.3% over the long term. So given the 2.02% dividend and stable valuation, the total annual return to shareholders could be 17.3%. Not to mention the stability of the dividend.
Analyst estimates confirm the company's positive outlook. They see no slowdown in cash flow, which is key to shareholder remuneration. Despite expected higher investments, free cash flow is expected to reach $9.1 billion in 2025.
With a current market capitalization of $1208 billion, this implies a free cash flow yield for 2023 of 7.6%, rising to 8.4% in 2025. That said, CAT is cheap - it trades at 10 times free cash flow, the lowest in a decade.
CAT looks undervalued based on fundamentals, but market sentiment is pushing the stock down. Long-term investors with a focus on cash flow and dividend growth still see CAT as attractive.
Macro
With interest rates high, demand tends to slow. And as we know - currently Fed rates are really high. The Federal Reserve plans to start cutting rates by the end of 2023. By 2025, rates are expected to be at 3%. Historically low interest rates have made construction projects, including new home construction and remodeling projects on existing homes, more attractive.
The company is heavily dependent on foreign customers, so the more the U.S. dollar strengthens, the less customers abroad will be willing to spend.
However, these are probably only minor risks and influences. This company has weathered much worse situations.
Disclaimer: This is in no way an investment recommendation. This is purely my summary and analysis based on data from the internet and other sources. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.
