Company Description: Caterpillar Inc. is the world's largest producer of earthmoving equipment, and a big maker of electric power generators and engines used in petroleum markets, and mining equipment.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
CAT is trading at a discount to only 1.) above. When also considering the NPV MMA Differential, the stock is trading at a 13.1% premium to its calculated fair value of $73.12. CAT did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
CAT earned one Star in this section for 3.) above. CAT earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1914 and has increased its dividend payments for 23 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
CAT earned a Star in this section for its NPV MMA Diff. of the $1,374. This amount is in excess of the $1,200 target I look for in a stock that has increased dividends as long as CAT has. The stock's current yield of 3.73% exceeds the 1.81% estimated 20-year average MMA rate.
Peers: The company's peer group includes: The Joy Global, Inc. (JOY) with a 0.2% yield, Komatsu Ltd. (KMTUY) with a 2.1% yield and Terex Corporation (TEX) with a 1.7% yield.
Conclusion: CAT did not earn any Stars in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of two Stars. This quantitatively ranks CAT as a 2-Star Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $59.17 before CAT's NPV MMA Differential increased to the $1,200 minimum that I look for in a stock with 23 years of consecutive dividend increases. At that price the stock would yield 4.4%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,200 NPV MMA Differential, the calculated rate is 8.2%. This dividend growth rate is higher than the 2.3% used in this analysis, thus providing no margin of safety. CAT has a risk rating of 2.00 which classifies it as a Medium risk stock.
CAT's business is highly dependent on global economic conditions. The company's Free Cash Flow Payout of 67% and Debt To Total Capital of 72% are both well above my desired maximums. The stock is currently trading well above my calculated fair value of $73.12. Given the current valuation and its dividend metrics, I will wait for a more opportune time before significantly adding to my position.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I held no position in CAT (0.0% of my Dividend Growth Portfolio). See a list of all my Dividend Growth Portfolio holdings here.
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Tags: CAT, JOY, KMTUY, TEX,