Caterpillar Inc. (NYSE: CAT) raised its dividend by 10 percent this week, which is typically good news for investors. However, analysts are reading between the lines of the relatively modest increase and speculating that Caterpillar’s outlook may not be as strong as the market had anticipated.
On Wednesday, Caterpillar’s board voted to increase its quarterly dividend by 10.2 percent from 78 cents per share to 86 cents per share. Bank of America analyst Ross Gilardi was anticipating a much more aggressive capital return announcement from Caterpillar. Bank of America had projected 89.5 cents per quarter, and Gilardi says Caterpillar’s cautious approach to capital return may not bode well for investors.
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“With a seemingly robust growth outlook, limited capex needs, and a stock price that has failed to respond to two strong quarters in a row, one might expect CAT to be generously returning cash to show a little conviction,” Gilardi says.
In the current construction machinery boom, Caterpillar has tripled its earnings per share and now has $8 billion of cash on its balance sheet. Gilardi estimates the company will generate another $6 billion to $7 billion in cash flow per year over the next few years, yet the company appears to be hoarding its cash.
Gilardi says Caterpillar’s cautious approach to capital returns may imply that management is not confident that the cyclical boom will last much longer. CAT stock is down 4.1 percent this year, seemingly providing an excellent opportunity for buybacks, but Caterpillar has been overly cautious.
“We respect that the last thing CAT wants is to cut the dividend at the next downturn, but this comes post disappointing buyback developments during [first-quarter] results that contributed to the stock’s surprisingly poor trading action,” Gilardi says.
Gilardi says Caterpillar will need to reach peak annual EPS in the $18 to $20 range to make the stock a compelling buy. He says it’s likely the only way Caterpillar can get to that point is by being much more aggressive with its buybacks. Up to this point, he’s seen nothing to suggest this type of aggressive approach.
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In the meantime, Gilardi says upside in CAT stock is limited.
“While CAT should have several more years of positive EPS growth, we think shares are fairly valued,” he says.
Bank of America has a “neutral” rating and $163 price target for CAT stock.
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Caterpillar Inc. (CAT) Stock Dividend Hike Is A Disappointment originally appeared on usnews.com
