Caterpillar: A Cheap Way to Bet on The World Not Ending; Plus a Dividend
We’re all up to speed on the fact that there’s a global economic slowdown at play. But outside of Europe, that hasn’t translated into outright recession. And we’re seeing plenty of governments step up with easing policy to spur investment; Brazil, China and South Korea have all recently ratcheted down their interest rates. Stateside it’s expected that the Federal Reserve will jump in if the current slow-growth clouds darken at all.
That’s not to suggest a big time rally is right around the corner, but nor does it guarantee that there’s a global recession on the way. And in that context, a stock like Caterpillar (CAT) is attractively priced as a way to bet on a “less bad” outcome for global economies.
Clearly, Caterpillar has been hit by expectations that the sky is falling and capital expenditures will dry up:
Thing is, Caterpillar just reported a 67% percent increase in second quarter earnings, and raised it’s earnings estimate for the year to $9.60 a share. That would continue the machinery behemoth’s strong rebound from the 2008/2009 global recession.
Despite some serious headwinds ( in addition to slowing economic growth around the globe, a stronger dollar is expected to result in a $1 billion hit to earnings for the year.) Caterpillar points out this slowdown is quite different. “…(W)e understand the world is facing challenges…the good news is, this doesn’t feel like 2008. Interest rates are low, central banks are prepared to inject more liquidity if needed, and housing is coming off lows, not a peak, and seems to be improving,” noted CEO Doug Oberhelman in a written statement announcing second-quarter results.
Yet the stock is trading as if we’re in a full blown recession. Caterpillar’s PE ratio is below the level it hit during the 2001-2002 recession and isn’t far off the level it fell to during the 2008 retrenchment.
Meanwhile, there’s also a 2.4% dividend yield at today’s entry point, and Caterpillar has a stellar record of boosting that payout.
The current payout level represents less than 15% of Caterpillar’s earnings, and about 40% of its available cash. That suggests Caterpillar will have no problem continuing its dividend payout history even if global growth takes its time to rev up again.
Filed under: Company Analysis