Heavy Dividend Lifting at Caterpillar (CAT)?

Buying Dow Jones Index components that yield above-average dividends has been a strategy employed by conservative income-seeking investors for many years.

One such company yielding a dividend above the index average is Caterpillar (CAT). The Illinois-based company designs, manufactures, markets and sells machinery and engines and sells financial products and insurance to customers via a worldwide dealer network. Caterpillar (CAT) is the world's largest manufacturer of construction and mining equipment, diesel and natural gas engines and industrial gas turbines.

At the current stock price of $57.76, the company yields 2.91% in dividends. The full year dividend came in at $1.68, or $0.42 quarterly.

Dividend growth at the company has been slowing over the last two to three years, which is the direct result of a 74% plunge in earnings per share from $5.67 in 2008 to just $1.43 in 2009, primarily related to much lower sales volumes, lower pricing and higher impairments. For the three years before that Caterpillar (CAT) managed to keep net income fairly stable at about $3.5 billion.

The latest quarterly cash dividend came in at $0.42 per share, which was the same as the previous seven quarters. However, Caterpillar (CAT) Chairman and Chief Executive Officer Jim Owens said, "Just as Caterpillar was prepared for and responded to the recession last year, Team Caterpillar has plans in place to respond to an economic turnaround and the increase in demand that accompanies such recoveries. By maintaining our dividend rate, we continue to reward stockholders while managing the business through the economic recovery." That would suggest the company is loath to cut the dividend regardless of the economic situation, which bodes well for the investor.

For the most recent quarter diluted earnings per share excluding abnormal items was $0.36, as compared to a loss of $0.19 per share a year ago. Also bear in mind that despite the very weak earnings numbers, Caterpillar remains a cash cow: last year the company raked in $6.3 billion in cash from operations, and in 2008 that figure was $4.7 billion, both way above reported net income and able to cover the dividend several times over.

It’s been a tough few years for the yellow giant, but the long-term future is looking good. The world is urbanizing and there is a tremendous demographic change taking place. People are starting to accumulate wealth and move up the demand price curve all over the globe. As such, they will demand better quality services, richer foods, financial services, better transport and better quality of life. This is a great economic tailwind for Caterpillar (CAT) to be operating from, as global infrastructure development is really in its infancy. There’s tremendous scope for earnings in the emerging world, and as the infrastructure in the United States begins to head toward its big upgrading phase, Caterpillar (CAT) is sure to benefit.

With a huge cash generating business model, management that is determined not to drop the dividend, and strong and exciting economic tailwinds, Caterpillar (CAT) might just be an excellent long-term dividend-paying investment.

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