As the gears of innovation turn, the industrial sector is revving up for a solid growth phase fueled by technological advancements and surging demand. The push for more commercial and residential spaces, rapid economic development, and significant infrastructure investments is propelling the industrial equipment and services market to new heights.
Texas-based Caterpillar Inc. (CAT), renowned for its heavy machinery, is thriving and leading the booming construction equipment market, which is projected to hit $273.9 billion by 2031, expanding at a 4.5% compound annual growth rate. Caterpillar is not just hanging on but growing, leveraging its century-old legacy to dominate and innovate, staying ahead of the game.
For those investors seeking out passive income, CAT also shines as a “Dividend Aristocrat,” with over a quarter-century of consecutive dividend growth. Most recently, CAT raised its dividend by over 8%, and massively expanded its share buyback plan. But is this dividend stock a smart buy at current levels? Let's find out.
About Caterpillar Stock
Caterpillar Inc. (CAT) has been a titan in the heavy machinery world for nearly a century since its inception in 1925. It has built a legacy in manufacturing and selling top-tier construction and mining equipment. From asphalt pavers to mining trucks and diesel-electric locomotives, Caterpillar's diverse product line powers industries worldwide.
Known for innovation, its segments cover construction, resource industries, energy & transportation, and financial products, providing comprehensive solutions and services. Caterpillar's relentless commitment to quality and performance keeps it at the forefront of heavy machinery and industrial technology. Its market cap currently stands at $157.6 billion.
Shares of Caterpillar have rallied 32.5% over the past 52 weeks, outperforming the broader S&P 500 Index's ($SPX) 24.4% returns, as well as the Industrial Select Sector SPDR Fund’s (XLI) 16.8% gains over the same time frame.
Caterpillar has been dishing out quarterly dividends since 1933. With a stellar 30-year streak of consecutive dividend growth, it has earned its place in the elite S&P 500 Dividend Aristocrats Index.
On June 12, the heavy equipment manufacturer boosted its quarterly dividend by 11 cents to $1.41 per share, payable to its shareholders on August 20. Its annualized dividend of $5.64 translates to a 1.75% dividend yield, higher than XLI’s 1.52% yield. Sporting a conservative payout ratio of just 23.12%, Caterpillar’s dividends are well-covered by earnings.
The board also raised its share repurchase authorization by $20 billion, totaling a massive $21.8 billion worth of its common stock.
The machinery, energy, and transportation (ME&T) segment, a powerhouse in heavy-duty machinery for resource industries, construction, and transportation, is a key driver of Caterpillar’s financial success. The strong performance of its ME&T segment fueled the share buyback and increased dividends. Caterpillar emphasized its dedication to returning free cash flow to shareholders through dividends and buybacks.
Caterpillar Chairman and CEO Jim Umpleby said, “Our strong financial performance supports increasing our quarterly dividend and share repurchase authorization, which aligns with our commitment to return substantially all ME&T free cash flow to shareholders over time.”
In terms of valuation, Caterpillar stock trades at 14.74 times forward earnings, which is lower than the construction machinery & heavy transportation equipment industry average and its own five-year average of 18.27x.
Caterpillar’s Q1 Bottom Line Beats Wall Street Projections
Caterpillar reported its Q1 earnings results on April 24, which exceeded Wall Street’s bottom-line forecast. While the company’s total revenue amounted to $15.8 billion, it generated an adjusted profit of $5.60 per share, which surpassed projections by 9.4%.
Its ME&T FCF amounted to $1.3 billion. Caterpillar’s dealer inventories for machines grew a higher-than-expected $1.1 billion in the quarter due to sales to end-users being "modestly lower" than it had anticipated. Its order backlog increased by $400 million sequentially to $27.9 billion, led by Energy & Transportation, and executives said they were confident that end-market demand would be stable this year.
For the three months ended March 31, enterprise operating cash flow was $2.1 billion, and the company ended the first quarter with $5 billion of enterprise cash. In the quarter, the company deployed $4.5 billion of cash for repurchases of Caterpillar common stock and $0.6 billion for dividends.
Looking ahead to the full fiscal year 2024, Caterpillar predicts revenue to hover around the $67.1 billion mark achieved in fiscal 2023. Dealer inventory changes are expected to have little impact, unlike last year's $700 million increase. Sales are forecasted to face headwinds, but services across segments are set for growth, eyeing a $28 billion target by 2026. Construction Industries are anticipated to dip slightly due to Europe's softer economy, though North America's demand remains strong.
What Do Analysts Expect for Caterpillar Stock?
Analysts tracking Caterpillar predict its profit per share to rise by 2.8% to $21.81 in fiscal 2024 and then increase another 6.3% to $23.18 in fiscal 2025.
Caterpillar has a consensus “Moderate Buy” rating overall. Of the 20 analysts covering the stock, six advise a “Strong Buy,” one gives a “Moderate Buy,” 11 suggest a “Hold,” and the remaining two recommend a “Strong Sell.”
The mean price target of $348.05 suggests an upside potential of 7% from the current price levels. However, the Street-high target price of $440 for Caterpillar implies the stock could rally as much as 35.3%.
On the date of publication, Sristi Suman Jayaswal did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
