Caterpillar’s dividend is more capable of growth than you might think.
Caterpillar’s long-term growth prospects
Lee Samaha (Caterpillar): The construction, mining, energy, and transportation company operates in cyclical end markets. When investors think of cyclical stocks, they usually associate them with volatile revenue and earnings, which means their dividend payments can be erratic.
However, the reality is Caterpillar has increased its dividend for the last 29 years in a row. h It’s an impressive record and looks set to continue due to a combination of favorable end markets and management actions.
Management has sought to reduce the cyclicality in its earnings by growing its services revenue, and it's still on track with its aim to increase services revenue from $14 billion in 2016 to $28 billion in 2026, not least through e-commerce initiatives, growing dealers, and selling connected assets.
At the same time, the company has a long-term growth opportunity coming from infrastructure spending and the possibility of an extended cycle of investment in mining machinery – the management of its key rival, Komatsu, has already spoken of improving momentum in mining machinery sales this year.
Moreover, Caterpillar’s current dividend payout of around $2.5 billion is easily covered by the $4 billion to $8 billion management expects to generate in free cash flow through the economic cycle. It all adds up to a company with plenty of potential to grow its dividend for many years to come.
