Why You Might Be Interested In Caterpillar Inc. (NYSE:CAT) For Its Upcoming Dividend

Caterpillar Inc. (NYSE:CAT) stock is about to trade ex-dividend in 4 days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. In other words, investors can purchase Caterpillar's shares before the 19th of April in order to be eligible for the dividend, which will be paid on the 20th of May.

The company's next dividend payment will be US$1.30 per share. Last year, in total, the company distributed US$5.20 to shareholders. Based on the last year's worth of payments, Caterpillar has a trailing yield of 1.4% on the current stock price of US$365.63. If you buy this business for its dividend, you should have an idea of whether Caterpillar's dividend is reliable and sustainable. So we need to investigate whether Caterpillar can afford its dividend, and if the dividend could grow.

See our latest analysis for Caterpillar

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Caterpillar paid out a comfortable 25% of its profit last year. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Fortunately, it paid out only 26% of its free cash flow in the past year.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. For this reason, we're glad to see Caterpillar's earnings per share have risen 15% per annum over the last five years. Earnings per share are growing rapidly and the company is keeping more than half of its earnings within the business; an attractive combination which could suggest the company is focused on reinvesting to grow earnings further. This will make it easier to fund future growth efforts and we think this is an attractive combination - plus the dividend can always be increased later.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Caterpillar has delivered 8.0% dividend growth per year on average over the past 10 years. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

To Sum It Up

Should investors buy Caterpillar for the upcoming dividend? We love that Caterpillar is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. These characteristics suggest the company is reinvesting in growing its business, while the conservative payout ratio also implies a reduced risk of the dividend being cut in the future. Caterpillar looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

While it's tempting to invest in Caterpillar for the dividends alone, you should always be mindful of the risks involved. For example - Caterpillar has 2 warning signs we think you should be aware of.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.