Recent Buy

buyI continue to remain aggressive hunting down the best deals on high-quality stocks I can possibly find and deploying capital when those sales present themselves.

It appears another sale presented itself. So I deployed some capital. What else would you expect, right?

The stock I’m going to discuss today is available at one of the best values that’s been offered on it over the last few years. It also sports the highest yield it’s possibly ever had outside the financial crisis. It’s a cyclical stock, but I see a long-term opportunity here.

I purchased 15 shares of Caterpillar Inc. (CAT) on 7/9/15 for $81.53 per share.

Overview

Caterpillar Inc. is the world’s largest manufacturer of heavy construction and mining equipment, and also manufactures diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives.

The company operates in the following five primary segments: Energy & Transportation (39% of fiscal year 2014 sales), Construction Industries (35%), Resource Industries (16%), Financial Products (6%), and All Other (3%).

Approximately 62% of FY 2014 revenue was generated outside the United States.

They have a network of 177 dealers – 129 of which are located outside the US. These dealers, which are mostly independently owned and operated, serve more than 180 countries and 3,500 outlets.

Fundamentals

I’ve long been somewhat lukewarm on Caterpillar due to the cyclical nature of the business and my opinion that Deere & Company (DE) is a slightly superior business. However, CAT and DE don’t compete across all their product lines; DE obviously concentrates on farm equipment, while CAT offers me more exposure to the construction, energy, and resource industries. In addition, CAT is far more global. So I view them as complementary holdings, and I like the idea of owning both as relatively small positions.

As a cyclical business, the fundamentals will vary depending on what time frame you’re looking at. I always like to look at the last 10 years of any company’s financials so as to smooth out any short-term fluctuations or cyclical peaks and troughs, but this isn’t always completely accurate. Nonetheless, I think it gives us the best apples-to-apples comparison possible.

Over the last decade, CAT’s growth has been mediocre. Not horrible, but not great. Recent weakness in its mining business has possibly clouded the long-term potential here.

Revenue is up from $36.339 billion to $55.184 billion from fiscal years 2005 to 2014. That’s a compound annual growth rate of 4.75%.

Earnings per share grew from $4.04 to $5.88 over the last decade, which is a CAGR of 4.26%.

Not all that impressive, but, again, the time frame matters for cyclical businesses. Looking at the 10-year growth of EPS from fiscal years 2003 to 2012, for instance, would show a compound annual growth rate over 20%.

S&P Capital IQ anticipates that EPS will compound at a 7% annual rate over the next three years, which I think would be more than acceptable for a business like this with the current trends in some of its major operating segments. It’s quite possible that an uptick in housing construction due to pent-up demand from the financial crisis could offset some of the weakness in mining. Some recent reports have shown that housing construction is back to pre-recession numbers.

The company repurchased approximately 11% of its outstanding shares over the last decade, which has helped buoy results and will likely continue to do so. Management authorized in January 2014 a new stock buyback plan, which allows them to repurchase up to $10 billion of the common stock – that’s about 1/5 of the entire company’s current market cap. That plan expires at the end of 2018.

In addition, the company has a robust backlog of $16.5 billion as of the end of Q1 2015. That’s down slightly from the end of 2014.

What I think is really wonderful about this business, though, is the dividend growth track record they’ve managed to build, especially factoring in the cyclical nature of demand on most of its products.

After all, it’s sustainable and growing dividend income I’m after as a dividend growth investor, and even better when that comes attached with a very attractive yield. Well, check, check, and check.

They’ve increased their dividend for the past 22 consecutive years.

And over the last decade, the company has increased that dividend at an annual rate of 12.8%. In fact, they just announced a 10% dividend increase in June, which gave me some confidence to go ahead and initiate a position here. If management is confident enough in operations to raise its dividend by 10%, then I’m confident enough to buy shares here.

That most recent dividend increase combined with weakness in the stock price – it’s down more than 10% on the year – has led to a sky-high yield of 3.78%. That’s pretty much unheard of for CAT.

The payout ratio is 49.4%, which is factoring in a recently increased dividend and weakness in earnings over the last couple years. The dividend appears extremely healthy here.

Overall, the dividend metrics are really appealing to me. You get a management team that obviously places a priority on increasing the dividend, a high yield, a double-digit long-term growth rate, and a moderate payout ratio. Not much to really dislike there across the board.

The company does maintain a leveraged balance sheet, though it looks worse than it really is due to the financing operations. Caterpillar obviously manufactures very large and very expensive machinery, and so the company offers retail and wholesale financing to its customers and dealers.

The long-term debt/equity ratio is 1.65, though approximately 2/3 of its long-term debt is related to financing. The interest coverage ratio is healthy at just below 13. They have more than $7 billion in cash and short-term investments on the balance sheet.

Profitability is strong, but it has been declining over the last couple years. This appears primarily due to the aforementioned headwinds. Over the last five years, the company has averaged net margin of 7.33% and return on equity of 29.90%. I see some room for improvement here, but nothing particularly worrisome.

Qualitative Aspects

Ever drive or walk by a construction site and not see Caterpillar’s familiar yellow machines working?

Probably not.

And that’s because the company sports the leading share of the world’s construction machinery market at approximately 19%. The heavy equipment the company manufactures and sells is necessary for its customers to get jobs done.

Caterpillar operates a global brand with a strong manufacturing and dealer network that offers its customers sales, financing, and support across the world. It’s in that massive dealer network that Caterpillar has an incredible competitive advantage. Knowing that there will be minimal downtime due to the quality and reputation of the products combined with the availability of support and service means Caterpillar is far ahead of most competition – CAT has had almost 100 years to build this network out.

The manufacturing footprint also stretches the globe, which affords the company economies of scale and logistics advantages.

Although they’ve faced intense competition in China, the company’s competitive position in global terms remains strong, from what I can see. There’s still a huge opportunity that exists due to the building out of infrastructure and housing that’s necessary in many countries, like India. And while the pricing for many commodities, including oil and iron ore, remain weak, which reduces demand for some of their equipment, the company’s diversification across geographies and product type insulates them somewhat.

Risks

The company is heavily exposed to a number of cyclical industries, making its very business model highly cyclical.

Since the company is extremely global with most of its sales occurring abroad, it faces currency risks.

Its global dominance has been challenged in China, as the company trails market leader Komatsu Ltd. (KMTUY).

Caterpillar also faces acquisition and integration risks. Poorly timed acquisition of Bucyrus International, Inc. in 2011 and the write-down of assets related to ERA Mining Machinery Limited highlight this risk.

Any slowdown in the global economy could adversely affect the company due to its exposure to economically sensitive industries.

Valuation

The stock is currently offered for a P/E ratio of 13.07. It’s tough to use that as an extremely accurate measuring stick due to the cyclical nature of operations, but I do find that reasonably appealing when looking out over the last decade or so for this stock. For perspective, the five-year average P/E ratio is 18.2.

I valued shares using a dividend discount model analysis with a 10% discount rate and a 6.5% long-term dividend growth rate. I think that growth rate is fair when looking at the long-term track record for underlying operational growth and dividend growth, as well as the moderate payout ratio and potential for growth moving forward. Both the long-term and short-term numbers for dividend growth seem to indicate I’m including a margin of safety there. The DDM analysis gives me a fair value of $93.72.

The stock appears undervalued by just about any metric you want to look at. However, I think a dearth of near-term catalysts compounded by aforementioned headwinds means this is a very long-term play (my favorite kind, of course).

Conclusion

There isn’t any other company in the world quite like CAT. Their scale, diversification, network, and brand are all unrivaled.

However, 2015 will likely be a tough year for the company. Now, Q1 results were quite solid – EPS of $1.81 per share was a 25.7% improvement over Q1 2014’s $1.44. And FY 2015 guidance was slightly improved to $4.70. All in all, though, the short-term picture isn’t that bright.

But that’s exactly when you buy a high-quality company. You don’t buy when the roses are red and violets are blue; you buy when the sky is gray and everyone thinks it’s falling. Well, that’s kind of where CAT is at right now. Shares are down almost 25% over the last year, which is substantial for the size of the company we’re talking about here. I like buying quality merchandise when it’s marked down, and I certainly appreciate a 25% cheaper price on the stock.

It also helps to know that Bill Gates, through the Bill & Melinda Gates Foundation Trust, owns almost 2% of Caterpillar. Notably, he also has a substantial stake in DE through his private holding company, Cascade Investment, LLC.

We’ve got a yield near 4% with double-digit dividend growth and more than two consecutive decades of dividend raises. And the stock appears to carry a margin of safety here, assuming they can increase the dividend in the upper single digits for the foreseeable future and beyond. At the very least, it’s fairly valued, even considering the headwinds.

This purchase adds $46.20 to my annual dividend income, based on the current $0.77 quarterly dividend.

I’m going to include current valuation opinions from other analysts below, which I use to concentrate my reasonable valuation estimate:

Morningstar rates CAT as a 3/5 star valuation, with a fair value estimate of $79.00.

S&P Capital IQ rates CAT as a 3/5 star “hold”, with a fair value calculation of $85.00.

I’ll update my Freedom Fund in early August to reflect this recent purchase.

Full Disclosure: Long DE and CAT.

Shareholder in CAT? Any thoughts on the company? Do you think the current price represents an opportunity? 

Thanks for reading.

Photo Credit: Stuart Miles/FreeDigitalPhotos.net

Similar Posts

102 Comments

  1. Good buy, Jason.

    It certainly the case that Caterpillar machinery is pretty ubiquitous almost anywhere you go. It is very impressive and seems comparatively stable as well. Your write-up shows what that does for a quality company: consistent earnings and dividend growth.

    A good buy and a good companion for Deere. Good luck with it!

  2. TDD,

    We’ll see how it goes with CAT. I’ve never been extremely enthusiastic about it, but a yield near 4% and a drop of 25% over the last year has increased my enthusiasm quite a bit.

    Operations are cyclical, but the dividend payments aren’t. That’s really what matters to me. 🙂

    Thanks for dropping by!

    Cheers.

  3. Hi Jason Great call with CAT I worked for them as a warehouse manager for 8 years over here in the UK and not only are they the greatest company in the world to work for but they have an absolute passion to be the best in class at all times. I also have a holding in CAT and I have no doubt that in a more favourable cliamte CAT with return to being a $100+ share. I worked for them during the 2008 period when the shares absolutely tanked but employees knew the shares would rebound because of the confidence the company has in its products and they were proved correct. My previous associates continue go have confidence in the products of the company and are purchasing shares when they are in the lower $80s so I figure what better endorsement can there be for confidence in long term future so I will also look to buy when shares go under $80.

  4. Raj,

    Thanks for the insight!

    They’re really unrivaled in many ways. I think some of the fundamentals have some room for improvement, but this is a world-class operation with a leading market share. Wasn’t particularly interested in CAT over the last couple years, but the strong dividend growth combined with the recent weakness in the share price changed my tune.

    I’m not really keen on seeing the share price jump to over $100 any time soon, but I certainly hope operations remain strong through the commodity issues. As long as that dividend keeps coming and management keeps raising it at a healthy level, I’ll be a very happy shareholder. 🙂

    Take care!

  5. Great buy!!! I bought CAT last time it was down at these levels. I watched it go up over $100 for a bit and then plummet. Yup, a cyclical stock indeed. But, capital-willing, I’m going to purchase some more at these levels. Great company, good stock. Also, so glad to hear they are great to work for, Raj. Makes me like them all the more. Welcome to the flock of owners, Jason!

  6. Mantra,

    Great purchase! i’ve purchased them twice throughout the year and was definitely pleased with their DGR. Though cyclical – it takes a long-term investor for this – and that’s what we are. Congratulations and it should pair well with DE. Here’s to a cheers for holding CAT stock!

    -Lanny

  7. Timely article for me. I’m not very familiar with the big machinery manufacturers like Caterpillar and John Deere, but I’ve just started looking into them. Here’s hoping Caterpillar turns into a butterfly for you!

  8. Nice purchase DM! CAT’s equipment is definitely on just about any construction site you go by. The yield is fantastic and with a 22 year streak going that’s quite impressive. With such a large percentage of their sales being international they’ve been getting crushed on the currency exchange. So being able to show a significant increase in earnings against the head wind of the currency fluctuation is pretty impressive. It’s probably time that I take another look at this company. I’d feel much better owning CAT and DE instead of just one or the other. Have each of them be a half position and call it a day. Thanks for the update.

  9. One other thing I like to look at for highly cyclical companies is the trough to trough growth, peak to peak growth, and trough to peak. That let’s you kind of see the growth across a wide variety of scenarios.

  10. ToughMother,

    Glad to be on the same page! 🙂

    Definitely cyclical, though a lot of dividend growth stocks are. As long as you’re in it for the long haul, you just have to use that to your advantage.

    We’ll see how it goes here, but I like their long-term chances. Hoping they can make some further inroads into China, however.

    Thanks for dropping in.

    Best regards!

  11. Lanny,

    Glad to own a (very small) slice of the company alongside you. Hope we can bulldoze our way to bigger dividends over the coming 20 or 30 years. 🙂

    Cheers!

  12. Jim,

    Larson is a pretty smart and well-regarded guy, and he seems to really like the machinery manufacturers like DE and CAT for Gates’s portfolios. I think, at the right price, these investments make a lot of sense. The barriers to entry are quite high and you have to have the right brand, network, reputation, and scale to make it work well.

    I’m hoping it turns into a butterfly as well. A big, beautiful one! 🙂

    Thanks for the support.

    Best wishes.

  13. JC,

    Yeah, the yield is pretty monstrous here for CAT. It’s just not often you can scoop up shares in the company with that kind of yield. Wouldn’t want it to be a particularly large position in the portfolio, but I also wouldn’t mind averaging down a bit, if given the opportunity. And I do think that it complements DE quite well. They focus on different machinery and CAT has that great international presence.

    Good point there about the cycles, though even that can be difficult sometimes. And that’s because not all cycles are the same and you also sometimes see cycles that are quite short, which results in the data not quite being as meaningful as you’d otherwise like it to be. But I think if you go back over the real long term, CAT’s growth is clear. You don’t put up 22 consecutive years of dividend raises out of thin air. 🙂

    Thanks for stopping by!

    Best regards.

  14. DM,

    Like the sound of that… it’s weird when you bring the time up – I’ve owned a few of my stocks for over 5 years now… and the yield on my cost basis is quite astounding — expect the same for these positions as we go through the tunnel of time!

    -Lanny

  15. FFdividend,

    I’ve only followed CAT lightly over the last few years, but now strikes me about as good a time as any to initiate or add to a position. I can see it dropping into the low $70s perhaps, but I’d be surprised to see it dip a lot lower than that. Of course, anything is possible when you have a lot of exposure to commodities. Sometimes the mania and depression swings too far in one direction or another.

    Cheers!

  16. Love CAT. Been in my portfolio for almost 8 years now and I plan to keep this cyclical name for many, many more years to come. I know you are luke warm on CAT relative to DE but it still is a great company with a nice current yield after it’s stock price has come down. I may wait to add to this name in my portfolio but I think baby DivHut might want it at current prices. Great buy.

  17. Lanny,

    Yeah, it takes some time to get used to that long-term perspective. I get comments and emails asking me about Stock X or Company Y’s issues over the last [insert short-term time period here], and I just respond that I’m looking at things with a multi-decade perspective. Do we really talk about Coca-Cola’s volumes in 1993? Or Exxon’s Valdez spill? Or Johnson & Johnson’s recalls from even just a few years ago? People have very short-term memories and tend to be hyperfocused on the here and now. I just don’t look at things that way.

    I have many holdings now that are five years old. But that’s still just such a short period of time to really own a slice of a business. I look forward to seeing these holdings mature and marinate a bit over the next decade or two. 🙂

    Cheers!

  18. Keith,

    Glad to be on board with you here. Very excited to one day have eight years of ownership on this one. 🙂

    Agreed with you. DE is a slightly superior company in a few different ways, but I still think CAT stands on its own as a pretty strong investment. You don’t build that kind of brand power and network overnight. Seems to me that it’s very likely they’ll be profiting (and raising that dividend) for years to come.

    Baby DH should do well with this one.

    Cheers!

  19. Dividend Mantra,

    Great entry point. This is a great company that is going through a rough patch. As Warren Buffett said he likes to buy good companies when they are on the operating table.

    The stock will do well over time as there will be always be a need for their equipment.

  20. You are buying so much so often now that you almost don’t even need to write any other articles, I for one love reading all of them because it shows me all these different stocks that could eventually end up in my own portfolio. Great post

  21. Jason, like you, I initiated a position in CAT this past week. Of the companies on my watchlist, it had the most compelling combination of valuation and long-term prospects. That said, there’s some notable downside risk in the price of the stock: when the Fed raises interest rates later this year, if there’s a swift perception or reality of diminished economic activity for interest-sensitive sectors like construction, CAT could take a hit. That said, they’re a wide-moated producer of essential machinery, and unless the whole world enters a depression, they should do well over the next several years…and particularly when the dollar reverts to its mean value. If CAT drops from here, and barring any faux pas from their management, I’ll consider adding to my position.

    I also added some ETN, PFE, and HP. Might still be a bit early in the down cycle, but they all seem fairly- or underpriced, and since the future is still to play out, it seems better to put capital to work now rather than to try to time the market later.

  22. IP,

    Indeed. CAT has some challenges right now, but they’ve been around for a long time now and have operated through much worse conditions. I see no reason why this time will be any different. 🙂

    I don’t necessarily think the company is on the operating table right now, but they’re not sitting in a great spot. Nonetheless, I think this represents a long-term opportunity as long as you’re okay with the ups and downs. The machinery they manufacture isn’t going anywhere.

    Thanks for stopping by. Let’s keep it rolling!

    Best regards.

  23. Always good to look at the long term and I think CAT will be there. Even with our poor CAD I might pick a few shares up this week since it’s one I’ve wanted.

  24. Your portfolio looks a lot like the high yield index that Vanguard offers with an average yield of 3.3%

    200k puts you right at about 6-7k a year in dividends.

    Nice buy nonetheless!!!

  25. Tyler,

    Ha! Yeah, more posts on stock purchases than I’m historically used to. A good situation to be in, though. 🙂

    I’ve got at least one more coming this month, but I’ve also got some other concepts I’m going to explore as we wind down the month. Stay tuned!

    Thanks for the support.

    Best wishes!

  26. Hey there,

    nice buy. I always wonder who you American guys can buy for such low amounts. You must have incredibly cheap purchasing provisions. If I buy a stock at my online broker in Germany, I bay 16 EUR = 18 USD for each purchase, regardless if I buy for 100 EUR or for 5000 EUR. Thats why I can’t afford to buy so few stocks… If I’d invest 1000 EUR the dividend is cut by 1.6% already for the first year, so I try to buy only for 3000 EUR….

    All the best
    Simbi

  27. EvenKeel,

    Absolutely. The stock price could go anywhere from here. But I’m not concerned at all about the stock price – a cheaper price could be a boon for the repurchasing program, assuming the cash flow is there. I am concerned, however, about operational results. And I think the company will continue to do well there over the next decade or so. Major projects don’t get done without the machinery that CAT manufactures, but that demand will ebb and flow. Mining is weak right now, but it won’t be forever. This too shall pass. In the meanwhile, we get a company that’s 25% off its price just last summer. I’ll take it. 🙂

    Glad to be a fellow shareholder with you. Let’s hope they do right by us!

    Best regards.

  28. Daniel,

    I’m forming my own fund, custom designed to my own needs (with a higher yield than that). And I won’t pay a fee for the rest of my life for the privilege of owning these stocks. Works pretty well for me. 🙂

    Hoping I hit that $7,200 mark in dividend income this year. Should be a strong finish!

    Cheers.

  29. They may be cyclical, but their products will always be necessary as long as we as a country and specie engage in construction, industry, and mining. And that will be as long as we need homes and buildings, manufacturing, and resources. In other words, forever.

    Good to have you as a fellow shareholder for both CAT and DE. Where I am, there is a ton of roadwork going on. It’s like the whole city is being built now. And I always see the bulldozers from one of these two companies around. It’s nice to see the companies’ there, knowing that the city or property or whoever has paid for that equipment and a small sliver of it will be going right into my pocket. People get mad about the construction blocking traffic, but not me. I’m not a driver, just an owner. And it’s good to be an owner.

    Glad to see your aggressive streak is still going strong.

    Sincerely,
    ARB–Angry Retail Banker

  30. Simbi,

    Yeah, we’re really fortunate over here to have such low commission fees. I paid $4.95 on this. I try to limit my commission fees to 0.5%, on average. If I were paying $18 per transaction, I’d probably try to make sure transactions were at least $3,600 in size.

    I’ll sometimes see investors pay $4 or $5 to buy just a few hundred dollars worth of stock. That’s not a very good idea, in my opinion. Better than not investing at all, but not better than the alternative of limiting your commission costs.

    Thanks for dropping in!

    Take care.

  31. Stephen,

    Absolutely. Gotta look at the long term on this one. And that really goes for just about any stock out there. If you’re not in it for at least the next five years, you probably shouldn’t be in it at all.

    Looking forward to being a fellow shareholder, if you invest here. 🙂

    Cheers!

  32. ARB,

    Glad to know those machines are out there putting in work! 🙂

    I know exactly what you mean over there about not getting upset to see construction anymore. I think the same way when I see a train go by. Used to really bother me when they would stop traffic. Not anymore, as long as it’s UNP or NSC. And now I won’t be bothered by construction work anymore. Seems investing is a panacea for the world’s little annoyances.

    Thanks for dropping by. Glad to know we’ll both collect a little sliver of this company’s profit moving forward.

    Best regards.

  33. Hi Jason
    CAT is a great company that’s been around of quite sometime. They have been able to weather down turns in the economy. During the good times CAT will prosper. CAT takes care of their stock holders with that great dividend. CAT produces well built products that people are going to buy. This company has a hugh moat around it. Great buy in a company that going to be around along time and paying that juicy dividend. Congrats Jason.

  34. Compared with a lot of beaten-down DGI-type cyclical companies in the industrial and energy sectors, CAT’s payout ratio is exemplary.

  35. Great purchase, DM. Solid company – that has its fundamentals well in order. Once the materials/mining sectors pick back up, the company should see more upside. Definitely a good time to buy.

    Best wishes
    R2R

  36. I’ve never thought about buying CAT before, but that’s certainly an interesting idea. Bill McBride believes that economic growth will continue for a few more years, which means that CAT should experience robust sales growth.

  37. Great buy! I think we discussed this a while back, you didn’t like CAT. I think you can definitely hold DE And CAT! Also pickup CMI last week. What’s not to like here!!!!!

    Good luck,

  38. Great buy here Jason! You continue to take advantage of the downturn that has taken place over the month and build on your core holdings. While the company is cyclical, it is a market leader in the industry and seems to have established a wide moat (most likely due to their economies of scale). The company has had a heck of a journey over the last year it seems and the stock price has had some swings. But they have a great track record recently of returning value to their shareholders, so why not stick through the cycles and collect a few extra shares via DRIP along the way?

    Once again, great pick up and way to continue growing your dividend income. Keep up the great work here!

    Bert

  39. Good buy DM! I do not own CAT yet in my portfolio. However, I’ve added many companies past weeks at a brisk pace to keep the momentum going. Keep racing and adding dividends to the kitty.

  40. I remember discussing this one with you before, glad you are a owner as well. But I only have 2 shares, but a pretty good dividend.

  41. michael,

    I’m with you. I love the enthusiasm! 🙂

    The dividend growth track record is pretty impressive all by itself. But considering how cyclical operations are, it’s especially impressive. Even better, but there’s so much room for improvement here. Mining is way down, they’ve had challenges in China, and the global economy is still on the fritz. Just imagine when they’re firing on all cylinders. Look out!

    Thanks for dropping by.

    Best wishes.

  42. LOMD,

    Thanks!

    We’ll see how it goes here. But I like their chances over the next 10 or 20 years. 🙂

    Nice move over there with CVX. Glad to be a fellow shareholder!

    Best regards.

  43. R2R,

    I’m with you. There’s a lot of upside here. If they can fire on all cylinders once more, there’s some real potential. In the meanwhile, I can wait it out. 🙂

    Thanks for dropping by. Hope all is well!

    Cheers.

  44. Tony,

    I like the sound of that! 🙂

    We’ll see how it goes. I don’t really see any near-term catalyst besides the housing data, but I think the long-term picture is still bright.

    Thanks for dropping by and sharing that.

    Best regards.

  45. j-harr,

    Yeah, I’ve long been lukewarm on the company and the stock. But I’ve become a lot less lukewarm on the stock after the rather substantial price drop over the last year or so. And I’ve become less lukewarm on the company lately as they continue to boost that dividend year in and year out, even with challenges.

    Nice move on CMI. That’s another attractively valued stock with a relatively high yield (historically speaking) and a great dividend growth track record. Enjoy those dividends. 🙂

    Cheers!

  46. Bert,

    Yeah, I sure love a good sale. Except my preferred merchandise is high-quality dividend growth stocks. 🙂

    Thanks for stopping in. Keep up the great work over there!

    Best regards.

  47. R2R,

    CAT seems like a pretty solid buy right now. About as good as it’s ever been, from what I can see. Not to say it won’t be much cheaper in the future, but just that I think the long-term opportunity is there.

    Nice moves over there on all the stock buys. You’ve been putting away a lot of capital over there. I’d just be careful on the transaction sizes, unless you’re paying something like $1 per transaction.

    Take care!

  48. Is there any reason why you don’t seem to purchase any mlp’s? I realize the expected distribution growth is lower on average than a stock, but the starting yield’s are usually much higher. Maybe it would be a good idea to have some.

  49. Mike,

    Yeah, I’ve discussed that quite a few times when investing in the midstream space. I prefer the GPs due to the IDRs. I get the exposure with higher dividend growth and better total returns. I’m not just after the highest-yielding stocks. I’m after stocks that can provide attractive income, sustainable and growing dividends, high quality, and solid total return prospects. In my experience, I’ve tended to do best with stocks yielding from 1% to 3% compared to the high-yield stuff.

    Take care!

  50. Jason,

    I dig the recent purchases. Similar to UNP, BBL, and HSY all experiencing market dips, CAT has been hovering down some 25% of recent highs as well. I’m surprised you haven’t scooped up any more EMR yet….EMR and the Canadian banks are my targets for the next couple weeks (TD and RY with 4% yields right now)

    Guy

  51. Guy,

    Exactly! Quality merchandise that’s marked down. 🙂

    I like EMR quite a bit as well. And the Canadian banks (though, less so). But only enough capital to go around. I’m actually investing way more right now than I historically have, but even that has limits. Wish I could buy up everything, but I just can’t.

    Happy shopping over there!

    Cheers.

  52. I also use DeGiro in the Netherlands, and they are really cheap (indeed €0.5 + $0.004 per US share), so about €0.5-0.7 for a transaction of ca. €2.000

  53. Jason,
    CAT is a great company! There products are great and they work. I have a couple of thoughts on CAT. A question, do you know what percent of CAT’s sales go into the construction/coal industry? The construction/coal industry are really depressed and they may not return to the pasted glory. The other thought, you said that CAT has 177 dealers and that there are 129 outside the US. So most of their dealers are outside the US, do you have any idea what the effect of the strong dollar has on sales of CAT equipment compared to the Chinese equipment? CAT equipment comes at a premium price! Competition will take any advantage of CAT, because this will make CAT’s products more expensive!
    Jason, please get your crystal ball out and tell us what the future holds? HA!
    Please keep writing, great information, because you try to make us use our brains to think! Oh, it hurts! HA!
    Nut501

  54. Jason,

    I’m long DE here and almost went long CAT. I think this is a great purchase. Domestically our infrastructure is not in the shape it once was, and people do not realize the work it will take to get it there. As we bounce along the way there eventually figuring out all the work that needs to be done, CAT will be in prime position. In the mean time I see lots of construction and construction sites (both because of work travel and due to work). CAT, DE, Komastu, Kubota, Mitsubishi, Case, Volvo, and numerous others are always out there on those sites. However, CAT and DE are by far the most common (for larger non-Bobcat style equipment) for all companies and operators seem to prefer them. I would be shocked if your play on CAT did not end with you being happy with your choice.

    Congrats on the income,
    Gremlin

  55. Jason,

    Found your site a few months ago and now read it every day. Sold my truck, finished paying off my credit card debt, and invested $9000 into some quality dividend stocks. CAT was the fifth thing I bought. I may be down slightly right now but that is the beauty of the long term outlook. If the market goes up the portfolio increases which looks nice, and if the market tumbles you get a chance to buy with a better yield. This month is my record for dividend income $16.50 from Coke, and it can only go up from there.

    Just wanted to say thanks, and congratulate you for such an inspiration site. Keep up the hard work and watch the payments keep flowing in.

  56. Nut501,

    CAT certainly offers a lot to like. A really solid company across the board. And I think there’s room for improvement from here, so it’s not like we’re looking at a business that’s peaking or anything.

    As far as the construction industry goes, I listed that at the outset of the article. 35% of last year’s revenue was generated via sales in that segment of the business. I’m not sure about coal, though. I don’t recall running across the company breaking it down like that. But if you run across something in the 10-K to the contrary, let me know.

    The strong dollar will impact CAT’s results, but that’s true for any multinational company. I honestly don’t get the obsession over the strong dollar. Global commerce comes with so many wonderful benefits, but currency exchange rates are just one of those things that is going to cause oscillating results. Sometimes it works to the favor of a company, sometimes not. I don’t see any reason why over the course of a decade or two that it will be a significant headwind or tailwind. But you can see in the Q1 results that currency effects accounted for a $342 million drag on revenue, which came in at $12.493 billion. So we’re talking a couple percentage points. I’m not real concerned about it.

    It’s good to use our brains, my friend. Especially when talking about our money. 🙂

    Appreciate the support. Hope that helps!

    Best regards.

  57. Gremlin,

    I know exactly how you feel over there, being long DE and almost going long on CAT. Found myself interested and then not interested a few times now. But I can’t pass up CAT with an almost 4% yield here on what I think is a pretty strong valuation for the long haul. I don’t think CAT’s a steal, but I also don’t see how it doesn’t provide solid income and attractive growth from here.

    Infrastructure is a major problem across the globe. If you think the infrastructure of our company isn’t all that great, just imagine what third world countries are dealing with. Civilization has certainly come a long way over the last hundred years or so, but we’ve still got a long, long way to make it so that life is pretty good across the board. Plenty more building out to occur. I’m excited. 🙂

    Thanks for the support. Appreciate you stopping by!

    Cheers.

  58. Josh,

    Hey, thanks for sharing that. You’re in a great spot over there. How exciting, right? Unloaded a metal box that you probably don’t really need (unless you live 15 or 20 miles from work and have no other options), paid off some debt, and now you’re in control of your future. I’m confident you’ll see some really solid progress from here, especially with starting with $9k right off the bat. 🙂

    That $16.50 is just the start. Bigger and better things to come if you stick with it.

    Thanks for the support and readership. Stick around. A lot more content on its way.

    Best wishes!

  59. What are your thoughts on COP and BHP Jason? I bought these stocks in the last 6 months at significantly discounted prices and they have continued to fall sharply. Are you considering adding shares here?

  60. Hi Jason,

    Nice buy with CAT! Offtopic: I was just re-reading your DIS Recent Buy and reading the comments of that buy. You mention in the comments that you’d like to make DIS a core position for Freedom Fund. I know that DIS has been a rocket since you bought. Are you considering adding to this position anymore or maybe it’s already in the overpriced category? Also what are your thoughts on ESPN and the change to a la carte channel service against the bundles that are offered now. Is that a large risk with DIS that they will start losing cable customers? People are probably always going to want to watch their sports live though. I have been an extremely happy DIS shareholder so far and it i’m tempted to get some more shares but maybe that’s not such a good idea with current valuation. Anyway I think the company is one of the most quality and a solid pick for the long term. Thanks for your work and stay hungry.

  61. Nick,

    I’m all topped up on COP and BBL, so I’m not real interested in adding to either of them. COP has been one of my best investments, all in all. BBL is down since I bought it, so I sometimes think about buying more shares and then using a tax-loss strategy to unload some more expensive shares, but my cost basis is overall pretty attractive there. I’m not unhappy with my stake in either company.

    Cheers!

  62. Sampo,

    Love DIS. One of my favorite companies in general terms and certainly my favorite entertainment/media company.

    I definitely plan on increasing my position at some point here. It’s just one of those situations where other stocks that I’m interested in have been falling (sometimes significantly) while DIS continues to simultaneously rise. Disney appears closer to fair value now, versus the pretty solid deal I think I scored on shares back in December. But as results continue to improve, the value of the company increases. It’ll be one of those stocks I’ll probably have to average up on over time.

    We’ll see how it goes. Only so much capital to go around, unfortunately. A good first world problem to have. 🙂

    Best regards!

  63. Nice!! Have owned CAT for awhile and will add when it goes below $80(maybe after earnings later this week). Stumbled on to your site and now IM ADDICTED!! Your in depth analysis of your recent buys is fantastic. Thanks for doing what you do

  64. I like the long term play here as I think that they will grow meaningfully over time. Curious as to whether or not the huge slowdown in China will impact them in the short term. I know that they are number two, but that region could impact a lot if they slow down on purchasing raw materials which could impact CAT negatively and offer an even more compelling point to add. Either way enjoy the new income!

  65. Tm,

    Thanks so much. Appreciate the support. Glad you’re enjoying the site! 🙂

    Lots more content to come. Stay in touch.

    Take care.

  66. DD,

    The building out of society will obviously oscillate with the economy and demand for projects, but I think you have to really think about CAT like most other stock investments – long term. Short term, anything is possible. But I think when looking out over the next decade or two, CAT has a pretty good opportunity in front of them to grow and pay increasing dividends along the way. In the meanwhile, the yield near 4% with a payout ratio below 50% on depressed earnings is a pretty good place to start. Even with guidance for this year, the dividend is well covered. We’ll see how it goes. 🙂

    Thanks for dropping in!

    Best regards.

  67. Hi Dm,

    I suspect this buy is a little boyhood dream come true. As little boys I suspect we al played with dozers and excavators ( yup, with the name caterpillar on it). And we al dreamed of driving with those things if we were grown up. Well now you have a piece of this company (still no dozer, but who knows) and it will keep giving you dividends and pleasure just like the toys.

    Cheers,
    G

  68. Hi Jason,

    Nice addition on CAT. I’ve been an owner for a few years and this does look like a great time to add. That yield is looking quite nice, and the increases have been good. Like you I have been picking up some shares lately. I added to EMR, LMT and CVX. In addition, I started a position in HSY and SJM. Any thoughts on SJM? Not the cheapest, but I’m prepared to average down if given the chance.

  69. Geblin,

    Ha! Definitely. Nothing like making a boyhood dream come true, right? 🙂

    Now only if I could find a sensible way to invest in sports cars… It’s unfortunate that most auto manufacturers can’t manage their cycles as well as the heavy machinery companies. Not sure I’ll ever have planes, trains, and automobiles all locked up.

    Cheers!

  70. presone,

    Yeah, I was interested in seeing what CAT would do with the most recent dividend increase. I don’t know how you can be disappointed with a 10% raise in this difficult environment.

    SJM is a solid smaller company. I thought it was overvalued not long ago:

    http://dailytradealert.com/2015/05/09/caution-this-dividend-growth-stock-appears-12-overvalued-3/

    It’s come down some since then and now appears a lot closer to fair value. Although, the recent dividend increase was a bit disappointing. And I think they’ll continue to face strong competition in coffee. High-quality coffee is now ubiquitous compared to just five years ago.

    Thanks for stopping by!

    Cheers.

  71. Jason,

    Do you have a sector breakdown of your portfolio holdings? I’m curious approximately what percentage of your portfolio you allot to industrials, energy, consumer discretionary, and utilities? Thanks!

  72. Thanks for the analysis. The financial numbers are pretty solid and the dividend growth is amazing. I’ll keep an eye on them and will try to initiate a small position when we have a little extra money. CAT has been on my list for a long time.

  73. Thanks for the response Jason. By the way, read your book and enjoyed it thoroughly. Moving on to The Intelligent Investor next.
    You make a compelling case for me to pick up some CAT and I believe that will be my next position. Keep up the good work.

  74. Joe,

    No problem. Hope you found some value in it! 🙂

    CAT’s been on my watch list for some time now – years, actually. Just never found the right opportunity until now. Maybe I jumped the gun and operations will be poor for the next few years. But the dividend is certainly covered here and I think they’ll continue to grow it. As long as that happens, I’ll be just fine.

    Thanks for stopping by!

    Cheers.

  75. Nick,

    If it were food, my book would be the free bread the restaurant gives out before you order… Graham’s book would be filet mignon. You’ll surely enjoy it. 🙂

    Thanks so much for the support, though. Glad you enjoyed it. Means a lot to me!

    Best regards.

  76. Hi Dm,

    I think that the 3 german car manufacturers are pretty good ( Daimler, BMW, Volkswagen). And I heard Ferrari will also get an IPO later this year. So maybe in a few years:)

    Cheers

  77. Jason,
    You are invested in approximately 62 companies presently. How do you plow through all of the company reports each year? I am invested in about 1/3 the companies you do and I find that it is a difficult task each year. I enjoy what you are trying to accomplish!

  78. Geblin,

    I think Volkswagen might be your best bet there. Diversified operations and you get exposure to Lambo. Pretty nice. Although, the dividend growth track record is quite short, operations can be very cyclical, and, last I knew, the dividend taxation wasn’t all that friendly. I’ll stick mostly to my UK and Canadian stocks for my foreign exposure. 🙂

    Cheers!

  79. IW,

    Yeah, the company is very international. Most of their business is outside the US, actually. 🙂

    Glad to know the machines are out and about in Spain.

    Cheers!

  80. Brent,

    Thanks for stopping by!

    I don’t find it particularly time consuming to run a portfolio this large. At least, not any more time consuming than owning, say, 20 stocks. But I discussed that here:

    https://www.dividendmantra.com/2014/11/is-managing-a-large-dividend-growth-stock-portfolio-time-consuming/

    Hope that helps. Although, some people just simply prefer a smaller portfolio. No right or wrong answer. Just depends on what works for you. 🙂

    Best regards.

  81. Jason, You’re right. CAT has been around forever. It is the quintessential name for this equipment, just as Kleenex is for tissue. Even if I see a DE machine somewhere, I “think” CAT. I did not realize the stock had gone down 25%, and at this level I am a buyer and will do so when I finish writing this comment. I noticed that another poster asked how you could manage to follow 62 companies. The answer is obvious to me; this is what you do. Period. You follow stocks, especially the ones you own. We – as your readers – can benefit from your picks if we so choose. Signing off to sign on to Wells Trade. Dan

  82. Hi Jason, good pick here, I like CAT long term, short term the whole market really scares me. I’m like you, modeling a portfolio that by year end should be about $100k but with possible high interest rates, China and Europe uncertainty, central bank manipulation, are you doing anything to hedge against a stock market decline, like if we fall back into recession? I have done what I though would never do, lately and yesterday after the dip bought quite a bit of gold and silver and over the last couple months moved from about 5% in cash to now 20%, took some good profits off the table. One area I like long term is oil because its one of the few things that are low right now along with utilities, I bought SO at a 5.1% yield. Thanks again, love the website and what you are doing

  83. Dan,

    Looking forward to being fellow owners. I think CAT will serve us well. 🙂

    As far as following companies, you’re partially right. Following stocks has become intermixed with my “work” these days, though I was managing a fairly large portfolio even back when I was working more than 50 hours per week at the dealership (and writing for this blog and other sites). I don’t think it’s all that difficult, but some people find it time consuming for some reason. Stick to the quality stuff and it shouldn’t really be much of an exercise.

    Let’s bulldoze our way to dividends (and profit). 🙂

    Cheers!

  84. Josh,

    Yeah, I’m not worried about the short term at all. I think in terms of decades. Will we be talking about market conditions on July 21st, 2015 in 10 years? Do we still talk about Black Monday? We barely even talk about what happened seven years ago. It’s all so scary in the moment, but these are nothing but blips on the radar when stretched out over ten or twenty (or more) years.

    I was asked a similar question more than a year ago (why you can’t time the market), and this is how I responded:

    https://www.dividendmantra.com/2014/06/why-investing-new-capital-during-all-time-market-highs-doesnt-scare-me/

    I could probably extrapolate on that even more now, and have from time to time. But that’s the gist.

    Hope that helps. And good luck with the precious metals. 🙂

    Take care.

  85. Jason,

    During the mid-90s, my economics professor in college repeatedly proclaimed how great Caterpillar was as a company. Great business models survive the test of time. Keep inspiring us to achieve our version of dreams, freedom and self-actualization.

    Respectfully,
    Joe

  86. CAT has been on my radar for a while now but I just can never seem to pull the trigger. They are a great company and like just about every one else… whenever I see a bull dozer or dump truck, if it doesnt say CAT on the side I am still thinking that it is a CAT machine. I think I keep putting them off because of the cyclical nature of the stock. You just never know when the market will become saturated with older bull dozers and parts and such and then there is no need for the bigger and better equipment for years. As such the stock will continue to flounder. A 25% drop is just about as good as is gets to add the position to a portfolio though.

    Thanks for continuing to bring CAT to my attention.

    ADD

  87. ADD,

    Yeah, cyclical stocks like CAT aren’t for everyone. But as long as that dividend isn’t cyclical, I’ll be a very happy long-term shareholder. 🙂

    We’ll see how it goes!

    Cheers.

  88. Great move! I’ve had CAT for a number of years. Thinking about adding more. For the dividend, and for other reasons you pointed out. CAT is a brand like DE, IBM, PG, etc. with equipment all over the world.
    Loooong CAT!

  89. I made my first ever purchase of CAT on Thursday for 76.25 at dvidend yield of 4%. I wish I had been more patient. It went down more today. I took a small position and will certainly by more when/if it goes into 60’s. The stock is clearly under huge pressure so seems conceivable it goes down (possibly a lot) more. I think it plunged from a high in 80’s to a low high 20’s in 2009. The yield at that time spiked for a short time to 7 or 8 %. I guess it could even go to 40’s this time if commodities pressure continues or accelerates.

  90. DD,

    Nice move there! Glad to be a fellow shareholder with you. 🙂

    A lot of stocks went way down in 2008 and 2009. CAT could fall a lot more. So could a lot of other stocks. Or not. I don’t really worry about that all that much. As long as CAT keeps funneling increasing cash flow my way, I’ll be a very happy shareholder. They kept increasing their dividend straight through the Great Recession, and I see that as about as great a test as any. But I guess we’ll see.

    What a great opportunity to pick up CAT in the $20s. Sure wouldn’t mind another chance like that…

    Cheers!

  91. Between this post and your new post about adding to your position in CAT I couldn’t help myself and had to jump on board. I also added a position in WPC as I have been watching this stock since your post about creating a position and I really like what I see.
    I have a few questions that I hope you will be kind enough to answer for me:
    1. In The Intelligent Investor, Graham mentions many times that he likes a stock allocation of between 25 and 75 percent. Do you follow this at all or are you planning on being 100% stocks going forward?
    2. I noticed that REITS like WPC and OHI (I have a poser in this too) typically have much higher PE and payout ratios. I follow your qualifying fundamentals mentioned in your book for non REIT stocks but was wondering what your qualifying fundamentals are for REITS?
    3. What website do you use to track important dividend stock fundamentals (I’m sure you mentioned this before so I apologize in advance)? I am currently using dividendinvestor.com but for some reason it does not look like the section for Consecutive Div. Increases is accurate as you mention in this post that CAT has increased dividends for 22 years but this site says only 1 year.

    As always, thanks in advance for your great blog and consistent responses.

    Best,
    Nick

  92. Nick,

    I’m comfortable with 100% equities right now. If rates rise enough to where some fixed income becomes attractive, I might take a look. But high-quality stocks provide so much excess return that I don’t know why I’d want much exposure to bonds. I personally don’t mind the volatility. But YMMV.

    As far as REITs go, I wouldn’t buy them if I didn’t know how to evaluate them. It sounds like that’s the situation you’re in. I’d be careful not to repeat that in the future. You really don’t look at P/E ratios for REITs due to the unique way they report profit. You’ll instead want to look at funds from operations or adjusted funds from operations. This primer should get you started:

    http://www.investopedia.com/articles/04/112204.asp

    For your third question, David Fish’s CCC list is robust and invaluable. I reference it frequently:

    http://www.dripinvesting.org/Tools/U.S.DividendChampions.pdf

    Hope that helps!

    Take care.

Leave a Reply