Caterpillar Inc. Offers an Impressive Silver Lining for Long-Term Investors

Caterpillar is the world's largest manufacturer of heavy construction machinery. Source: Caterpillar.

Caterpillar's business has definitely seen better days. The heavy-equipment maker's annual revenue plummeted more than 18% in 2013 from the previous year, a top-line decline of roughly $10 billion. More recently, Caterpillar's global machine sales dropped 13% in the three-month period ending in April -- its worst plunge since February 2010. With a mere glance investors could fairly assume that Caterpillar is only capable of using its heavy equipment to dig the company's future a bigger hole.

However, after taking a closer look, there is a silver lining for Caterpillar investors.

Returning value
Despite Caterpillar's difficulties in generating incremental revenue for investors, the company has consistently, and impressively, given back to shareholders. Caterpillar since 2013 has returned more than $5 billion to shareholders through dividends and share buybacks. Furthermore, Caterpillar's dividend increases continue to climb, with recent gains checking in sequentially at 5%, 5%, 13%, 15%, and 17%.

In the most recent quarterly dividend increase, Caterpillar this month raised the payout 17% to $0.70 per share of common stock, a continuation of a long stretch of payouts that began when the company was formed in 1925.

"This dividend increase demonstrates our financial strength and confidence in long-term prospects for the company. Despite business and economic uncertainties around the world, our balance sheet has remained strong -- the strongest it's been in more than two decades -- positioning us to perform through the cycles," Caterpillar Chairman and CEO Doug Oberhelman said in a June 11 press release announcing the dividend increase.

Caterpillar has set a pristine standard over the years for returning value to shareholders. Investors would like to see the amount of shares outstanding gradually decline, combined with a consistent increase in the dividend -- when charted it should form an X. Caterpillar passes the test with flying colors:

CAT Shares Outstanding Chart

CAT Shares Outstanding data by YCharts.

That's the big silver lining in owning Caterpillar stock; you can afford to wait for a rebound in its core businesses while receiving a dividend yield of about 2.6% -- roughly double that of peer Joy Global's yield -- and an annual earnings-per-share boost through share buybacks. In fact, partially due to Caterpillar's share buybacks, its profit per share was up 22% in the first quarter without help from rising revenue that remained flat, year over year.

Looking ahead
Last year was rough as sales plunged and revenue dropped; unfortunately, 2014 looks to be playing out in similar fashion. However, Caterpillar has effectively focused on cutting costs to help salvage the bottom line, including slashing 7% of its workforce last year. In the most recent quarter, Caterpillar posted better than expected earnings and sales, and raised its full-year profit outlook based on its improving construction business.

It's no secret that Caterpillar has been treading through rough waters due to extreme weakness in its mining business, but that once-vital business only accounted for 17% of sales and 12% of operating profit in the first quarter of 2014. That means its effect on the overall business is less than it has been historically. Furthermore, as the housing industry continues to improve in the U.S., investors are looking toward Caterpillar's construction industries business for growth.

Consider that in the first quarter Caterpillar's construction industries revenue surged 20% higher, compared to last year's first quarter. That surge compares favorably to the 8% climb in its energy and transportation segment, and a horrendous 37% decline in its resource industries segment, which is mostly mining business. In terms of profits, Caterpillar's construction industries recorded a staggering 202% increase, compared to last year; the segment now accounts for more than a third of the company's total revenue and roughly half of its operating profit. 

As Caterpillar's construction business continues to surge the company is well positioned for a stronger back half performance in this decade. If and when commodity prices improve in China's mining end market it will help Caterpillar's resource industries segment return to a much more profitable business. Until then, the company's consistent returning of value is a silver lining for investors willing to hold shares long term.

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