First Look at Dow 30 component Caterpillar (CAT). Little DIV Yield, Huge DIV Growth.

Today I take a first look at heavy equipment giant Caterpillar (CAT).  This is the second stock in a series I’m writing on the Dow 30 stocks since many of them are dividend payers.  The dividend yield is puny, but the dividend growth has been tremendous.  It is speculatively priced today.  Lastly, their balance sheet is really ugly.  It’s not the ugliest I’ve seen, but it is pretty close.  To see how I came to these conclusions read on.

Caterpillar (CAT)

Price: $95.99

Shares: 666 million fully diluted at the end of 2011

Market capitalization: $62.63 billion (based on the undiluted 652.5 million shares)

What does the company do: Based in Peoria, Ill., Caterpillar is the world's largest manufacturer of heavy construction machinery such as bulldozers, excavators, and loaders and equipment for surface and underground mines. The firm also produces engines for its own off-highway vehicles and others' machines. Cat supports its machinery and engine revenue with a financial services arm, a logistics business, and remanufacturing service work.

Morningstar’s take: Caterpillar is the largest heavy equipment manufacturer in the world and holds an especially dominant share in the U.S. market. With its rebounding end markets, we don't think Cat has lost its competitive edge.

Bonds: $12.2 billion

Times interest earned: 3.95 times (over 5.0 is adequate)  Caterpillar earned $4.928 billion in 2011 and it paid $1.222 billion in interest expense in the same year.  Caterpillar’s bonds are a growing threat to the dividend, but since their dividend payout ratio is less than 50% it will take a few more years to really threaten the dividend.

Preferred stock: none.

DIVIDEND RECORD: No dividend cuts all the way back to 1987 (that’s the limit on Google Finance’s dataset).  Caterpillar has grown its dividend from $0.02 quarterly per share in 1987 to $0.46 quarterly in 2011.  That is a 2,200% straight-line gain over 25 years.  That equates to 88% per year straight-line dividend growth.

Dividend: $0.46 quarterly

Dividend yield: 1.9% ($1.84 annual dividend / $95.99 share price)

Dividend payout: 23% (using recent 2011 EPS of $7.92) –OR- 39% (using average adjusted earning power of $4.72)

EARNING POWER: $4.72 per share at 666 million shares

(earnings adjusted for changes in capitalization – typically share buybacks and/or additional shares created)

	EPS	Net income	Shares	Adjusted EPS
2005	$4.04	$2,854 M	706 M	$4.29
2006	$5.17	$3,537 M	684 M	$5.31
2007	$5.37	$3,541 M	660 M	$5.32
2008	$5.66	$3,557 M	628 M	$5.34
2009	$1.43	$895 M	626 M	$1.34
2010	$4.15	$2,700 M	650 M	$4.05
2011	$7.40	$4,928 M	666 M	$7.40

Seven year average adjusted earnings per share is $4.72

Consider contrarian buying below $37.76 (8 times average adjusted EPS)

Consider value buying below $56.64 (12 times average adjusted EPS)

Consider speculative selling above $94.40 (20 times average adjusted EPS)

Caterpillar (CAT) is currently trading at 20.3 times average adjusted EPS.  This is stock is speculatively priced.

BALANCE SHEET – Way too much total liabilities (Red) compared to shareholder equity (Green)!!  Some of the assets are likely overvalued because CAT has a financing business, but the liabilities are real.

Book value per share: $19.34

Price to book value ratio: 4.96 (under 1.0 is good)  CAT investors are paying $4.96 for each $1.00 in book value at the present time ($12,883 M in shareholder equity / 666 million shares).  That’s way too high for me.

Tangible book value per share: $2.15

Price to tangible book value: 44.65 (near 1.0 is good)  This is extremely high.

Current ratio: 1.49 latest quarter (over 2.0 is good)

Quick ratio: 0.52 latest quarter (over 1.0 is good)

Debt to equity ratio: 1.68 (lower is better)

Percentage of total assets in plant, property, and equipment: 17.37% (the higher the better)  Here are the other percentages: Current Assets were 47.92%, Other long term assets were 21.17%, and Intangibles were 13.55%

Working capital trend: nicely upward

Here are some questions you had better be able to answer before you buy Caterpillar:

CONCLUSION – The best time to buy Caterpillar in recent years was in February 2009 when the stock bottomed at $24.61.  It was in definite contrarian price territory because the average earning power from 2005 – 2009 was $4.32.  Since then it has more than tripled, but I think its heading back down again due to the return of the worldwide recession.  Caterpillar doesn’t have a high dividend yield, but it is an amazing dividend grower through boom and bust.  However, today Caterpillar is speculatively priced at 20.3 its seven year average earning power of $4.72 per share.  That’s where the good news ends because Caterpillar’s balance sheet is horribly weak.  Almost every measure of balance sheet strength shows weakness.  The price to book value ratios, current ratios, quick ratios, and debt to equity are deep into the red.  The working capital position is about the only good part of the balance sheet.  I suspect the financial arm is contributing to that weakness because banks borrow short and lend long, but I haven’t read all the financial statements.  I would ignore CAT until it drops back down in $56.64 value price territory.  Recessions hurt equipment manufacturers like CAT.  The stock price will be hurt greatly.

DISCLOSURE – I don’t own Caterpillar (CAT).

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