Company Description: Caterpillar Inc. is the world's largest producer of earthmoving equipment, and a major manufacturer of mining equipment, electric power generators and engines used in petroleum markets.
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 premium to all four valuations above. When also considering the NPV MMA Differential, the stock is trading at a 174.5% premium to its calculated fair value of $36.69. 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 1.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The company has paid a cash dividend to shareholders every year since 1914 and has increased its dividend payments for 0 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
The NPV MMA Diff. of the $87 is below the $3,500 target I look for in a stock that has increased dividends as long as CAT has. The stock's current yield of 3.06% exceeds the 2.71% estimated 20-year average MMA rate.
Peers: The company's peer group includes: The Joy Global, Inc. (JOY) with a 0.1% yield, Komatsu Ltd. (KMTUY) with a 0.5% yield and Terex Corporation (TEX) with a 1.0% yield.
Conclusion: CAT did not earn any Stars in the Fair Value section, earned one Star in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of one Star. This quantitatively ranks CAT as a 1-Star Very Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $30.82 before CAT's NPV MMA Differential increased to the $3,500 minimum that I look for in a stock with 0 years of consecutive dividend increases. At that price the stock would yield 10.0%.
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 11.6%. This dividend growth rate is higher than the 0.0% used in this analysis, thus providing no margin of safety. CAT has a risk rating of 2.25 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 46% is well below my desired maximum. While is Debt To Total Capital of 74% is well above my desired maximum. The stock is currently trading at a significant premium to my calculated fair value of $36.69. The company has not raised its dividend since July 2015. Given the current valuation and its dividend metrics, I will not be buying any time soon.
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,