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Should You Buy Caterpillar And Its 2.1% Dividend?

Over the last couple months, I’ve shown you stocks to avoid…

Stocks to consider buying…

And some of the best stocks related to the coming Internet of Things…  Which you can find linked further below.

All these recommendations are to help you either avoid pain and terrible stocks.  Or to help you find potentially great stocks to invest in during this pandemic.

If you do both well, it helps you earn higher than average investment returns and build wealth.

Because the fewer investment losses you have the more capital you keep. And the more capital you keep the faster you compound your money.

Today I answer Should You Buy Caterpillar And its 2.1% Dividend to help you figure out if you should buy this agricultural giant for your retirement portfolio.


Caterpillar (CAT) is the world’s largest heavy equipment manufacturer owning 16% of the global market in 2019.

It’s based in Deerfield Illinois.  It has a $107.56 billion market cap. And it pays a 2.1% dividend which is reason #1 to consider buying its stock.

Caterpillar’s 2.1% Dividend

Over the last decade Caterpillar’s paid out a total of $26.50 per share in dividends.

At today’s share count of 550 million, that’s equal to $14.58 billion paid out to shareholders in that time.

Plus, it grew its dividend from $1.72 per share in 2010 to $4.12 per share now which is a total growth rate of 140% since 2010.

These regular payments help you earn more money for your retirement.  And they’ll help you in any kind of prolonged economic issues like we’re dealing with today.

It can do this because it earns large profits.  Which is reason #2 to consider buying Caterpillar’s stock.

Caterpillar Earns Large Profits

Over the last decade it earned an average operating income margin of 11.3% per year.  

I look for anything above 10% consistently.

Another way I look at how profitable a company is by looking at its free cash flow to sales (FCF/Sales) margin.

Over the last decade this averaged 6.6%.

I call this the “Cash Machine” metric.

I look for anything above 5% on a consistent basis for the same reasons as I look for high operating profit margins above.  If a company surpasses both thresholds it makes it a great operating business that is both safe and ultra-valuable.

Why these two metrics instead of net income – or earnings – like most people do?

Two reasons…

  1. Net income is far easier to manipulate than operating income or free cash flow.

If you have good enough lawyers and accountants, you can make your net income about whatever you want to by using things like tax credits and loopholes.

  1. Any time I evaluate a stock, I look at it as if I were to own the entire company.  And doing that I want to know the actual profit a company produces from its operations.

Which is what operating income and FCF/Sales show you.

Caterpillar surpasses both ultra-important metrics. This not only means Caterpillar is a world class business operation.  But it also adds an enormous margin of safety to potentially buying its stock.

Most of the time when a company generates large profits, it leads to little debt for the company compared to its profits and size… That’s not entirely the case here for Caterpillar though.

Caterpillar Has Higher Debt Than I Like

As of this writing it has $9.32 billion in cash compared to $38.13 billion in debt.

As a percentage of its balance sheet, total liabilities make up only 80.5%.

Debt makes up 35.4% of its market cap.

And its debt-to-equity ratio is 1.75.

While not terrible, these are still higher than I’d like.

For example, I look for stocks that have a debt-to-equity ratio below 1.  And debt levels as low as possible compared to cash and profits.


Because this makes the company a safer investment.  This is especially important with all the uncertainty going on today.

Especially with the agricultural and heavy equipment arena Caterpillar is in.

As one example, revenues in the last twelve months are down 20.2% to $43.66 billion compared to $54.72 billion in 2018 due to Covid and the trade war.

And this will continue to some degree since we’re still dealing with the pandemic.

This led Caterpillar to its lowest operating profit since 2017.

Again, it’s still enormously profitable… But with revenues and profits lower due to Covid – and still likely going forward – this adds more risk to potentially buying Caterpillar stock due to its debt load.

Not a deal breaker… But something to watch.

But what about its valuation?  Is it cheap enough to buy? 

Caterpillar IS NOT Cheap

With the markets at or near all-time highs you’d expect a great stock like Caterpillar to be selling at an enormous valuation.

Unfortunately, it is.

Its P/E is 36.3.

Its P/CF is 17.2.

Its forward P/E is 25.3.

And its EV/EBIT is 30.

On all three metrics at the top, I look to buy investments below 20 to consider them undervalued.

And on EV/EBIT I look to buy stocks below 8.

These show that Caterpillar is overvalued right now.

And this means owning its stock gives you no margin of safety in investing terminology.

When you invest in stocks that have a margin of safety it makes the investment safer.  And it also means you should expect to earn higher returns owning it in the coming years.

The inverse of this is also true…

When you invest in a stock without a margin of safety it makes the investment riskier.  And it also means you should expect to earn less owning it going forward.

This is a deal breaker.

Because Caterpillar is overvalued, it makes owning its stock enormously risky.  Especially when considering its debt load and business falling due to Covid.  And for this reason, I recommend you avoid buying it for now.


If you’re looking for a solid, safe, dividend paying, stable, and enormously profitable investment to buy, consider Caterpillar… But only when its cheaper.

Use the following links to some of our recent articles to learn other ways to protect yourself and your investments in these uncertain times.

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.

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