Portfolio Update
The FiveTwenty portfolio received $123.99 in dividends in the past week. GPC, MDU, and TROW paid their quarterly dividend during the week.
| Past Week Dividend | $123.99 |
| Current Quarter Dividend (Q2 2022) | $1,322.49 |
| LifeTime Dividend | $4,607.16 |
| Estimated Annual Dividend | $5,568.33 |
The capital allocation for the weeks of 06/26/2022 to 07/02/2022 and 07/03/2022 to 07/09/2022 will be used to establish a position in Caterpillar Inc (NYSE: CAT). This week is a double capital allocation week as we did not make any investments last week.
CAT – Company Profile
Caterpillar Inc. (CAT) manufactures and sells construction and mining equipment, diesel and natural gas engines, and industrial gas turbines across the world. The company operates through 4 business segments: construction industries, resource industries, energy & transportation, and financial products. Official Site | Wikipedia
| Dividend Streak | 28 years |
| Yield | 2.49% (MRD 2.69%) |
| Payout Ratio | 41%* |
| P/E | 16.46* |
* computed using TTM adjusted EPS of $10.83 as of Q1 2022
Financials
Does CAT have the financial means to sustain and raise its dividend going forward?
CAT operates in a highly cyclical business segment. As such over the last decade, revenues and net income have been highly volatile. While the company’s financials take big hits during economic down year when commodity prices are lower, the company’s fortunes tend to bounce right back. The down years of 2009 and 2020 were followed by strong recoveries in revenues and earnings in 2010 and 2021.
In the last 10 years, CAT has managed to grow adjusted EPS from $5.79 in 2013 to $10.82 in 2021. However, the growth in EPS has been just as inconsistent as revenue and net earnings growth.
The average dividend per share growth rate was 8.90% per year in the past 10 years and 9.30% per year in the past 3 years. (per GuruFocus) At the same time, with the exception of 2016 and 2020 when EPS dropped sharply, CAT has managed to maintain a payout ratio of 30-40%.
FY 2021 earnings
Following at though FY 2020, CAT saw strong recovery in FY 2021. For the full year revenues were up 22% and adjusted EPS increased 64.8% over the previous year. In additional, as signs of confidence in the strength of the business, CAT increased its dividend payout in during both FY 2021 and again in FY 2022 by 8% on both occasions.
Valuation
Are we paying too much for CAT at the current share price?
In the last 10 years, CAT’s P/E ratio saw a low of 8.39 and a high of 769, with a median value of 16.2. (per GuruFocus) The current TTM P/E ratio of 16.46 is just about at the historical median value.
The current share price of $178.29 is 14% below the 50-day moving average and 13.6% below the 200-day moving average. Additionally, the share price is near the bottom of the 52 week trading range.
Yield
How does the current dividend yield for CAT compare to historical values?
In the last 10 years, the dividend yield for CAT has been in a range of 1.55% to 4.91%, with a median of 2.45%. The current TTM yield of 2.49% is just above the media value. The MRD yield of 2.69% makes the valuation on yield even more attractive.
Thesis
Why are we adding CAT to the FiveTwenty portfolio?
CAT has a strong track record of increasing its dividend payout year over year. The company has shown the ability to carefully mange its dividend payout all throughout the volatility of its business cycle. While it has on occasion paused dividend increases during tough financial years it has quickly bounced back and resumed dividend hikes. The most recent example of this was FY 2020 and FY 2021.
Overall, we are opening a position in CAT with the expectation that the company will continue to be a reliable source of dividends for years to come.
Additional Research
Photo by Sindy Süßengut on Unsplash