Caterpillar Dividend Hike Challenges 2011 Guidance (CAT)

If you have been watching shares of Caterpillar Inc. (NYSE: CAT), you might be tricked into believing that the global growth story is done.  With shares down around $99.00 this morning, its shares are down a sharp 15% from its 52-week high of $116.55.  Guess again.  The company’s Board of Directors has just voted today to raise the quarterly cash dividend.  The new dividend will be $0.02 higher at $0.46 per quarter.  Investors love to see higher dividends, but we would note that the company has offered guidance that might be considered short of consensus estimates in its 2011 outlook.

While the dividend is now about 1.86% based upon a $99.00 share price and based upon the new dividend, this is one dividend which still may have a lot of room to grow in the years ahead.  Today’s hike was after four consecutive quarters of a $0.42 payout.  The other reason today’s hike might not sound like much is that Caterpillar stock is still up about 80% from its 52-week low of $54.89.  That is actually the highest gain off of 52-week lows of all 30 DJIA components.

Thomson Reuters has operating earnings consensus estimates of $6.85 EPS for 2011 and $8.95 for 2012.  When a company increases its dividend it is trying to signal to Wall Street and to Main Street that it can maintain that sort of payout for years into the future regardless of what its stock price does.

The company maintained guidance today but there is at least some caution.  It said that it looks like 2011 will be a good year “with demand for our products continuing to improve and our focus squarely on execution and controlling costs.”  The equipment giant reaffirmed its outlook for 2011 for $52 to $54 billion in revenues with earnings of $6.25 to $6.75 per share.  The only concern is that Thomson Reuters has estimates of $54.06 billion in revenues and  $6.85 EPS.  We won’t take today as a warning, but analysts are being told that they did get ahead of themselves in the estimates. If you take the mid-point of today’s range at $6.50, Caterpillar is effectively trading at about 15.2-times this year’s earnings.

A dividend of $1.84 annualized is only a 27% income payout ratio for this year and is only about 20.5% of the payout for next year.  Many industrial and equipment players have much higher income payout ratios. The big question is whether the company can still live up to those consensus earnings or not as some will say that the company sand-bagged its guidance.  Even if it falls short, Caterpillar can easily maintain and/or grow its dividend ahead.

Shares are down $0.64 at $99.23 currently.  The guidance may be close to a wash with the dividend, but shares now look neither cheap nor expensive.

JON C. OGG