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Caterpillar's Free Cash Flow Covers Dividends, But Global Headwinds Mounting

Published Thu, 14 Mar 2019 18:44:20 -0400 on Seeking Alpha

Image source: Caterpillar Inc.’s website
By Callum Turcan
Caterpillar Inc. (CAT) is generally viewed as an industrial bellwether due to the company selling everything from mining excavators to forklifts to transmission systems to buyers big and small all over the globe. Management’s commitment to dividend growth has endeared Caterpillar with many income-seeking investors, but the firm’s stock price over the past year has faced volatility as a result of trade wars and a less-than-rosy outlook for the global economy. We like the free cash flow generating potential of Cat's non-financial operations, but investors cannot lose sight of the risk inherent to the company's ties to cyclical end markets. Its financial services operations can add to that risk as it exposes Caterpillar to potentially weakening credit profiles of cyclical customers in the event of a downturn in a given end market.
2018 in Review
Strong revenue growth and margin expansion led to material income growth at Caterpillar last year. Company-wide, Caterpillar reported over 20% annual sales growth in 2018, pushing its revenue up to $54.7 billion. Revenue growth was supported by rising demand from resource extraction industries, rising North American construction activity, and recovering demand from North America’s oil & gas industry.
Due to margin expansion (we will dig deeper into that later on) and revenue growth, Caterpillar’s operating income jumped 86% year over year in 2018 to $8.3... Read more