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Dividend Aristocrats In Focus: Caterpillar Inc.

Updated on January 23rd, 2023 by Quinn Mohammed

Each year, we individually review each of the Dividend Aristocrats, a group of 65 stocks in the S&P 500 Index that has raised their dividends for at least 25 consecutive years.

To make it on the list of Dividend Aristocrats, a company must possess a profitable business model with a valuable brand, global competitive advantages, and the ability to withstand recessions. This is why Dividend Aristocrats can continue raising dividends in difficult years.

With this in mind, we have created a list of all 65 Dividend Aristocrats.

You can download your free copy of the Dividend Aristocrats list, along with important financial metrics such as price-to-earnings ratios and dividend yields, by clicking on the link below:


Caterpillar Inc. (CAT) joined the Dividend Aristocrats list in 2019. Even more impressive is the fact that Caterpillar operates in a highly cyclical industry, which normally prevents companies from attaining long histories of annual dividend increases.

However, Caterpillar’s management team has proven its commitment to returning cash to shareholders even through the inevitable ebbs and flows of the business over the years. Caterpillar also has durable competitive advantages that allow it to raise its dividend each year, even through downturns in the global economy.

Business Overview

Caterpillar was founded in 1925 and today competes in the manufacturing and selling of construction and mining equipment. The company also manufactures ancillary industrial products such as diesel engines and gas turbines. Caterpillar stock has a market capitalization of ~$130 billion, making it one of the largest industrial stocks in the world.

Industrial manufacturers benefited from strong demand in 2022 and 2021, which fueled growth and spurred global economic activity off the low base established in 2020 amid the pandemic. Caterpillar is also specifically exposed to the energy and mining industries, which have benefited due to increasing commodity prices.

On October 27th, 2022, Caterpillar reported third-quarter 2022 results for the period ending September 30th, 2022. The company reported revenue of $15.0 billion for the quarter, representing a 21% increase compared to Q3 2021. Construction Industries, Resource Industries, and Energy & Transportation posted increases of 19%, 30%, and 22%, respectively. All segments made meaningful gains in the quarter.

Source: Investor Presentation

This led to overall solid results for Caterpillar. Third-quarter adjusted earnings-per-share equaled $3.95 for the fourth quarter, compared to $2.66 in the same period the previous year.

Source: Investor Presentation

Additionally, Caterpillar returned $2.0 billion to shareholders through dividends and share repurchases during the quarter. The company also had $6.3 billion of enterprise cash.

For the full year, we expect Caterpillar to generate adjusted earnings-per-share of roughly $13.70.

Growth Prospects

Caterpillar is closely tied to global economic growth and commodity prices. Its customers extract resources from the earth and build and construct a wide variety of structures, so economic growth is key to funding that development.

This leads to some fairly extreme cyclicality in Caterpillar’s results, which then sees the stock swing wildly between extremes of the sentiment scale.

The coronavirus pandemic weighed heavily on the company, but the global economic recovery that ensued enabled Caterpillar to become highly profitable in 2021. In 2022, this theme continued, and Caterpillar is offsetting increased manufacturing costs with increased pricing. Caterpillar looks poised to generate record results in 2023.

Further, Caterpillar’s own cost-cutting measures have driven operating margins higher for years. While the bulk of the gains may have been realized, we see further potential for expense reductions to boost earnings positively.

However, the current environment with increasing interest rates is likely to cause an economic slowdown, which is likely to cause Caterpillar’s customers to defer the purchase of new equipment.

We forecast earnings will improve massively in 2022, with year-over-year growth exceeding 25%. We are forecasting $13.70 in earnings-per-share for 2022 to go along with a 5% growth rate over the intermediate term.

This reflects both some caution with regard to the cyclical nature of the business and Caterpillar’s ability to bounce back when demand returns.

Competitive Advantages & Recession Performance

Competitive advantages in industrial applications can be challenging, given that some competitors make similar products for most applications.

However, over the years, Caterpillar has built itself into one of the largest players in lucrative end markets such as construction, energy, and mining.

Its global presence affords it some diversification of revenue by segment and industry, but also geographically, which has served it well in recent years. Its scale also gives it the ability to leverage down variable costs per unit, which boosts margins.

However, Caterpillar is certainly not immune from recessions, as slowdowns in the global economy are generally accompanied by lower commodity prices and slowing construction spending.

These factors took a major toll on Caterpillar’s bottom line during the Great Recession, as its earnings were devastated, if only briefly.

Caterpillar’s earnings-per-share during the Great Recession are below:

While Caterpillar certainly felt the pain from the Great Recession, its earnings rebounded fairly quickly and reclaimed its pre-recession earnings-per-share number in 2011.

Caterpillar also experienced a large decline in earnings-per-share in 2020 due to the coronavirus pandemic but recovered strongly since then in a short period of time.

Therefore, it is clear that Caterpillar is exposed to recessions due to the economic bellwether nature of the heavy machinery industry. But it also has a history of recovering from downturns fairly quickly.

Valuation & Expected Returns

Caterpillar’s current price-to-earnings ratio is 18.2, based on the 2022 expected EPS of $13.70. This is an elevated valuation level for Caterpillar. Since 2012, shares of Caterpillar have traded with an average P/E ratio of about 16.5. We believe 15 is a reasonable, fair value estimate for Caterpillar, given its cyclical business and vulnerability to recessions and the current rising rate environment.

Periods of cyclicality are normal for Caterpillar when it comes to valuation. Today, we are seeing a moderate swing higher in the stock price relative to earnings. This could reduce future returns; if the P/E multiple declines from 16.0 to 15.0 over the next five years, it would lower annual returns by 3.8% per year in that time frame.

The other negative aspect of stocks with elevated valuations is that they also have lower dividend yields. As Caterpillar’s share price has risen in the past year, its dividend yield has declined to 1.9%. Dividends and earnings-per-share growth (expected at 5% per year) will add to shareholder returns, but the overvaluation of the stock is a hurdle to clear.

Based upon the factors discussed above, we see total returns of 3.3% per year. This leads us to rate Caterpillar a hold today.

Final Thoughts

Caterpillar stock continues its impressive rise, having increased over 17% in the past one year compared to a near 11% decline in the S&P 500 index. Results in 2022 are expected to be strong, just as in 2021 where revenue and earnings-per-share surged significantly due to strong demand and increasing commodity prices. While the stock is trading above its average PE and our fair value estimate, it is not severely overvalued.

Caterpillar has an industry-leading brand and a positive long-term growth outlook, but we feel the stock has simply become overpriced due to the rally since the pandemic lows. With a fair expected future return, we rate the stock a hold. Investors may be better off wait for a decline in the share price.

Further reading: See analysis on our favorite agriculture stocks.

Additionally, the following Sure Dividend databases contain the most reliable dividend growers in our investment universe:

If you’re looking for stocks with unique dividend characteristics, consider the following Sure Dividend databases:

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