Tuesday, November 14, 2017

Dividend Machine Fundamentals applied to CAT

Caterpillar, symbol CAT,  is in recovery mode after quite a fall from grace.  Below I apply my dividend screening criteria to CAT to see if I should add it to the 2017 Portfolio.

Earnings per share greater than dividend paid out:


Caterpillar's latest two quarters illustrate the value of their management expertise.  EPS finally exceed the dividend paid out.  Creating more EPS than dividend paid out is a fundamental that I cannot breach. 







I went back to 2013 to take a look at how their EPS and Dividend payout looked.  You can see in the table below that CAT was a cash cow.



Does their recent performance suggest CAT has turned the corner. The proof that CAT has turned it around will be in their fourth quarter earnings.  The fourth quarter has been their weakest quarter over the past three years.

Dividend growth of at least 4% to beat inflation:


Dividend growth in the past was robust until they hit trouble.   As recently as 2015 the dividend increase was 10% and then held steady for eight quarters until a recent 1.29% meager increase.



Dividend yield of 2.75% or greater than 10 year U.S. Treasury.


Today the 10 year U.S. Treasury yield is 2.4%.   Cat's simple yield is only 2.29% which is below my threshold of 2.75% and below the 10 year U.S. Treasury.  However, when covered call options can make up the difference, I can buy a stock with that low a dividend.

Covered calls on CAT are trading but none are enticing.  I need to be sure I have at least an 8% gain on price basis and a 1% yield from the premium.   This translates to at least a $148 strike price.  The premium would need to be $1.37 and the expiration out far enough that I would get the dividend during the time between selling the call and the expiration date.  For CAT the expiration date needs to be after about January 20, 2018 which is the expected next ex-dividend date.

Debt to Equity Ratio 1 or less or equal to industry standard


CAT sports a debt to equity ratio (D/E) of 2.299 well above my limit of 1.   However, Caterpillar is in a n industry that requires a lot of capital.  Therefore, I looked at Deere, symbol DE, which is an industry peer to see how CAT compares.  Indeed, DE's debt to equity ratio is over 4 which makes CAT's balance appear to be within industry standard.

I think we still need to wait for CAT before it again appears as a Dividend Machine stock.   I use these four criteria for my initial screen for dividend stocks.  I don't stop there.  All investors have their own screening criteria any some of the more useful are data such as free cash flow, return on assets, even P/E ratio.   P/E ratio of CAT is over 95 and that is way too high for me.

Patience is a virtue and I will watch CAT.  I may miss the opportunity if the stock price continues to soar as fundamentals improve, but I will take that risk.

I still hold a little bit of CAT.  I sold calls on most of my holdings and these shares were assigned most recently at $100.   I still have shares from dividend reinvestment so I am hoping the CAT turn around is real.

Good income investing comes from executing a tested strategy with discipline and this is an example of that discipline.


M* MoneyMadam