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Caterpillar Inc. (CAT - Analyst Report) upped its quarterly dividend by 6 cents to 52 cents to boost shareholder value.  The hike translates to a 13% increase from the prior dividend of 46 cents, marking the highest percentage increase in the dividend since the financial crisis of 2008.

The increased dividend will be paid on August 20, 2012, to stockholders of record on July 20, 2012. Caterpillar has been a consistent payer of quarterly dividends since its formation in 1925. The current dividend hike comes exactly after a year. The last dividend hike of 5% from 44 cents to 46 cents was announced in June 2011.

Prior to the recession, the company had increased its dividend by 17% to 42 cents. During the recession Caterpillar had refrained from hiking dividends. After a hiatus of two years, Caterpillar had resumed its trend of increasing the dividend in June 2010. The dividend was then raised by 2 cents or 5% to 44 cents.

Caterpillar’s strategy is to deliver Total Stockholder Return in the upper 25% of the S&P 500. The current hike represents its continued commitment to providing value to stockholders. During the past 10 years, Caterpillar’s total stockholder return has been 322%, which is in the top 25% of the S&P 500.

Meanwhile Caterpillar continues to focus on strengthening its balance sheet and improving cash flow. Caterpillar had cash and short-term investments of $2.8 billion as of March 31, 2012.  Total debt-to-capital ratio improved to 67% as of March 31, 2012 from 69% as of December 31, 2011. The debt-to-capital ratio at Machinery & Power Systems improved to 40.5% at the end of the first quarter of fiscal 2012 from 42.7% at the end of fiscal year-end 2011.

Caterpillar’s closest competitor, Deere & Co. (DE - Analyst Report) had hiked its dividend in March 2012. Deere increased its dividend by 12%, or 5 cents, to 46 cents. This was the tenth consecutive year of the company's dividend hike. Caterpillar’s annualized dividend yield of 2.39% falls behind Deere’s annualized dividend yield of 2.44%. Caterpillar’s dividend payout ratio of 22.56% is also short of Deere’s 23.16%.

Caterpillar has kicked off 2012 on a promising note by posting record earnings per share of $2.37 in the first quarter. Caterpillar has its sales guidance in the range of $68 billion to $72 billion for 2012 and raised its EPS guidance to $9.50.  This, if realized, would mark a record in Caterpillar s history, even ahead of last year’s ground-breaking results. Furthermore, Caterpillar is sitting on a record backlog that assures a promising 2012. Caterpillar thus has ample scope to increase its dividend payout. 

Caterpillar’s plans to open new facilities and expand existing operations, particularly in the emerging markets, will boost its long-term potential. Furthermore, the Bucyrus acquisition has positioned Caterpillar as the leading global mining original equipment manufacturer. However, margin headwinds, the European debt crisis and a slowing Chinese economy may impede its earnings growth in the near term. Thus, we maintain our Neutral recommendation on Caterpillar in conformity with the Zacks #3 Rank (short-term Hold rating) held by the stock over the near term.

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