Staying committed to its focus on delivering incremental returns to shareholders, the board of directors of Caterpillar Inc. (CAT - Free Report) has approved a 17% increase in its quarterly dividend, the highest percentage increase since 2010. The hike also reflects its balance sheet strength.
Caterpillar will now pay 70 cents per share to its shareholders every quarter, 10 cents more than the prior dividend of 60 cents per share. The increased dividend will be paid on Aug 20, 2014, to shareholders of record as of Jul 21, 2014. The current dividend hike comes exactly after a year. The last dividend hike of 15% from 52 cents to 60 cents was announced in June 2013.
Caterpillar follows the likes of its competitors ??? Deere & Company (DE - Free Report) and Joy Global Inc. ??? both of which had announced dividend hikes in May this year. Deere upped its quarterly dividend by 9 cents or 18% to 60 cents per share, marking the 12th consecutive year of dividend raise for the company. Joy Global had announced a 14% jump in the quarterly dividend rate to 20 cents per share from the previous rate of 17.5 cents.
With the increased dividend, Caterpillar’s dividend yield will go up from the current 2.21% to 2.58%, close to Deere’s 2.60% and double of Joy Global’s 1.30%. At current levels, Caterpillar’s 5 year average dividend yield of 2.25%, 5 Year Dividend Growth Rate of 6.70% and Payout Ratio of 38.97% are above the industry average of 1.98%, -4.44% and 14.27% respectively.
Despite weakness in its mining-related sales, Caterpillar returned over $5 billion to shareholders through share repurchases and dividends since 2013 till the first quarter of 2014. In the first quarter, Caterpillar repurchased approximately $1.7 billion of its common stock under an accelerated stock repurchase transaction completing its $7.5 billion repurchase authorization. In Jan 2014, its board approved a new authorization to repurchase up to $10 billion of Caterpillar common stock, which will expire on Dec 31, 2018. Share repurchases will be accretive to earnings in 2014 and provide support to the stock.
Caterpillar also delivered an impressive first quarter with earnings increasing 22% to $1.61 per share despite revenues remaining flat year over year at $13.2 billion. The company's incessant efforts to cut down costs, continued deployment of lean manufacturing initiatives and improvement in the Construction segment helped mitigate the effect of lower mining-related sales on its profits.
Caterpillar expects revenues in 2014 to be flat with 2013 or move up or down in a 5% range. Caterpillar will benefit from recovery in the U.S. construction sector, macroeconomic stabilization in Europe, growth in the Chinese Excavator market and a strong backlog.
Caterpillar currently retains a Zacks Rank #2 (Buy). Another stock that is worth considering in this sector is Komatsu Ltd. (KMTUY - Free Report) with a Zacks Rank #1 (Strong Buy).