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Caterpillar Inc. (NYSE:CAT) stock is about to trade ex-dividend in 4 days. Ex-dividend means that investors that purchase the stock on or after the 19th of January will not receive this dividend, which will be paid on the 19th of February.
Caterpillar's next dividend payment will be US$1.03 per share, on the back of last year when the company paid a total of US$4.12 to shareholders. Last year's total dividend payments show that Caterpillar has a trailing yield of 2.1% on the current share price of $195.89. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Caterpillar can afford its dividend, and if the dividend could grow.
View our latest analysis for Caterpillar
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Caterpillar paid out more than half (68%) of its earnings last year, which is a regular payout ratio for most companies. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Dividends consumed 51% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. This is why it's a relief to see Caterpillar earnings per share are up 8.9% per annum over the last five years. Decent historical earnings per share growth suggests Caterpillar has been effectively growing value for shareholders. However, it's now paying out more than half its earnings as dividends. If management lifts the payout ratio further, we'd take this as a tacit signal that the company's growth prospects are slowing.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Caterpillar has delivered an average of 9.4% per year annual increase in its dividend, based on the past 10 years of dividend payments. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.