Caterpillar Offers Shareholders 20% Quarterly Dividend Boost (CAT)

After reaching its 25th consecutive annual dividend hike last year, achieving the Dividend Aristocrat status, Caterpillar, Inc. (NYSE:CAT) extended its streak with a 20% boost to its quarterly dividend payout.

In addition to the requirement of at least 25 consecutive annual dividend boosts, S&P 500 companies must also have a $3 billion minimum market capitalization to qualify for the Dividend Aristocrat designation. After meeting the last requirement of 25 consecutive annual dividend hikes in mid-2018, Caterpillar became an S&P 500 Dividend Aristocrat in 2019, along with three other companies — Chubb (NYSE:CB), People’s United Financial (NASDAQ:PBCT) and United Technologies (NYSE:UTX). The number of companies with the Dividend Aristocrat status is just 57, even with addition of these four companies this year.

While Caterpillar continues delivering rising dividend income payouts to its shareholders, the share price has experienced a mild pullback since the beginning of 2018. However, the current share price pullback occurred after it nearly tripled over the preceding two-year period and reached its all-time high of more-than $170 in January 2018.

The 18-month decline took away some of the capital gains from existing shareholders. However, Caterpillar continues delivering higher-than-expected quarterly financial results and maintains strong fundamentals. The positive results could stabilize the share price and reverse the trend upwards. Therefore, some investors could see the current share price pullback as an opportunity to take a long position at discounted prices.

Potential tariffs and other trade barriers still remain a concern. However, progress on the tariff negotiations and Caterpillar’s shift towards higher revenue share from domestic markets should ease some of those concerns. Since 2011, Caterpillar’s North American share of total revenue more than doubled from approximately 20% to nearly half of the company’s total revenues for full-year 2018. Furthermore, lower business regulation and a reduction in corporate tax rates effective as of 2018 should offer additional relief and compensate for at least a portion of any potential revenue losses due to tariffs and other trade restrictions.

Despite the share price pullback from its all-time high at the beginning of 2018, the share price is down less than 4% over the past 12 months. With the share price holding relatively flat, the dividend payout increases have pushed the current dividend yield higher than the yields of Caterpillars peers in the Farm & Construction Machinery industry segment.

Investors with a positive outlook on Caterpillar that are considering making a long-term bet on the company’s stock, should act quickly to begin receiving the benefits of the high quarterly dividend immediately. The company will distribute its new quarterly payout amount on the August 20, 2019, pay date to all shareholders of record before the upcoming ex-dividend date on July 19, 2019.

Caterpillar, Inc. (NYSE:CAT)

Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives for industrial application. The company’s Construction Industries segment offers backhoes, loaders, prep tractors, excavators, graders, asphalt pavers, etc. CAT’s Resource Industries business segment provides electric rope and hydraulic shovels, landfill and soil compactors, track and rotary drills, hard rock vehicle and continuous mining systems, as well as mining, off-highway and articulated trucks. Additionally, the Energy & Transportation segment offers reciprocating engine-powered generators, turbines, centrifugal gas compressor, diesel-electric locomotives and other rail-related products and services. Founded as the Caterpillar Tractor Co. in 1925, the company changed its name to Caterpillar Inc. in 1986 and its headquarters are in Peoria, Illinois.

The company’s share price entered the trailing 12-month period still falling along the downtrend that started in January 2018. However, the share price bucked the downtrend in the first quarter of the trailing 12-month period and rose more than 18% towards its 52-week high of $158.23 on October 3, 2018.

Unfortunately, this upward move was just temporary. The share price gave back all those gains over the subsequent two weeks and then plunged additional 16% before reaching its 52-week low of $112.34 on October 24, 2018 — just three weeks after its one-year peak price.

Since bottoming out in late October 2018, the share price experienced an increased level of volatility. However, notwithstanding the additional volatility, the share price recovered almost all of its losses over the trailing 12-month period to close on July 8, 2019, at $134.84. While still more than 14% short of the 52-week high from October 2018, the July 5 closing price was nearly 1% higher than it was one year earlier, 20% above the 52-week from late-October 2018 and 22% higher than it was five years ago.

The company has boosted its quarterly payout amount 19.8% from $0.86 in the previous period to the upcoming $1.03 dividend distribution. Equivalent to a $4.12 annualized payout, the new dividend amount corresponds to a 3.06% forward yield, which is in line with the company’s own 3.03% average yield over the past five years.

Caterpillar’s current yield outperformed the 1.17% average yield of the entire Industrial Goods sector by more than 160%. Furthermore, the company’s 3.06% yield is currently the highest yield among Caterpillar’s peers in the Farm & Construction Machinery industry segments and 230% higher than the segments overall yield average of 0.92%.

Moreover, as the highest yield in the segment, Caterpillar’s current yield is also 115% higher than the 1.41% average yield of the segment’s only dividend-paying companies. Just over the past two decades, the company has enhanced its total annual dividend payout more than six-fold, which translates to a 9.7% average annual dividend growth rate.

Even with a flat share price performance, the company managed to distribute enough dividend income to deliver a 3.8% total return over the past 12 months. The total return over the past five years reached nearly 40%. However, because of a 45% price pullback between mid-2014 and the beginning of 2016, shareholders nearly doubled their investment over the past three years with a total return rate of 96.5%.

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