Is There Danger Lurking in Caterpillar Inc.’s Dividend?

Caterpillar raised its quarterly dividend by 10% in June, putting its 2015 annual dividend at $3.01 per share. That’s a 215% jump since 2005.

Latest dividend boost

Solid track record

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20150

0.5

1

1.5

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2.5

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3.5

Annu

al d

ivid

end

per s

hare

in $

Data source: Company financials. Chart by author

Dividend yield

Thanks to regular dividend increases and the recent drop in its stock price, Caterpillar’s dividend yield is among the highest in the industry today.

Best among all

Dividend payout

Caterpillar also has the highest dividend payout ratio (percentage of profit paid out as dividend) among peers.

Highest in the industry

The question is:

In fact, at its projected 2015 earnings of $4.7 per share, Caterpillar will be paying out 64% of its profits in dividends. Is it sustainable?

Let’s find out

A quick look at Caterpillar’s debt position, cash flows, and dividend payment history can give us an answer.

Debt

Caterpillar’s long-term debt has climbed steadily over the years…

Rising sharply

Cash flows

…but so have its cash flows.

Growing at a rapid pace

No mean feat

More notably, Caterpillar’s free cash flows have exceeded net income during the past couple of years -- something no peer can boast.

FCF > NI

A green flag

That’s a huge positive since a company pays dividends out of its free cash flow.

Dividend history

Caterpillar’s solid dividend history further strengthens its case.

Caterpillar has: paid a cash dividend every year since it was formed in

1925

more than doubled its cash dividend since 2006

paid out higher annual dividends to shareholders for 21 consecutive years

To summarize: Caterpillar

Is cash flow positiveGenerates strong free cash flowsHas control over its debtHas an excellent dividend-payment historyHas a comfortable payout ratio with room to grow

Foolish takeaway: No risk

Caterpillar is well-positioned to sustain, and even grow, its dividends going forward despite weak industry conditions.

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