ii view: Caterpillar costs overshadow profits beat

The pandemic has hurt but an enviable dividend track record remains. Buy, sell, or hold?

Fourth-quarter results to 31 December  

• Revenue up 23% to $13.8 billion
• Adjusted earnings per share up 27% to $2.69
• Quarterly dividend of $1.11 per share

Chief executive Jim Umpleby said:

“I’m proud of our global team’s continued resilience in what proved to be a challenging and dynamic operating environment. We delivered adjusted operating profit margins and ME&T free cash flows consistent with our long-term targets established during our 2019 Investor Day. Amid ongoing supply chain constraints, our team continues to execute our strategy for long-term profitable growth while striving to meet customer demand.”

ii round-up:

Heavy industrial equipment maker Caterpillar (NYSE:CAT) reported better than expected fourth-quarter earnings as it continued to recover from the pandemic, but also flagged increased costs such as materials and freight expenses weigh on margins. 

Total revenue for the quarter rose 23% year-over-year to $13.8 billion, helping push adjusted earnings per share up 27% to $2.69. That beat Wall Street estimates of nearer to $2.25 per share. 

Caterpillar shares fell 5%, having risen by around 15% over the last year. The broad S&P index is up by a similar amount over that time, while shares for fellow heavy equipment maker Deere & Co (NYSE:DE) are up by closer to 30%.   

A constituent of the Dow Jones 30 index, Caterpillar helps its customers pave roads, mine essential commodities or extract fuels to satisfy global energy demand. It previously bought the oil and gas equipment division of the UK’s Weir Group (LSE:WEIR).

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Caterpillar previously declared a quarterly dividend of $1.11 per share, unchanged from the prior quarter although up on the $1.03 declared this time last year. The digger maker has paid higher annual dividends to shareholders for more than 25 consecutive years. During 2021, it returned $5 billion through both dividends and share repurchases. 

Sales for construction and mining equipment during the quarter rose in equal measure, gaining 27% to $5.74 billion and $2.76 billion respectively. Energy and transportation revenue including sales of train locomotives climbed 19% to $5.73 billion. Total full year 2021 sales improved to $51 billion from 2020’s Covid disrupted $41.7 billion.  

ii view:

Established in 1925, today Caterpillar operates across the three primary divisions of construction industries, resource industries and energy and transportation. It employs over 90,000 people with around three-fifths of sales made outside of its home US market. 

For investors, elevated costs and industry wide supply chain issues should not be ignored. Environmental issues impacting its core business sectors also deserve consideration. But Caterpillar’s products are highly revered, and it offers diversity across both underlying customer sectors and geographically. A forecast dividend yield of 2% is also not totally derisory in an era of low savings rates, and it has paid a cash dividend every year since it was founded. In all, and while some caution remains sensible, room for long-term optimism remains. 

Positives: 

• Product and geographical diversity
• More than 25 years of consecutive annual dividend increases

Negatives:

• Elevated costs pressuring margins
• Uncertain pandemic and economic outlook

The average rating of stock market analysts:

Buy