Caterpillar Stock Is a Growth Play and (Maybe) an Income Play

Caterpillar (NYSE:CAT) has risen by nearly 5% over the last month. Though that leaves CAT stock still within its trading range, it offers some hope for the owners of CAT stock who have seen CAT do little over the last two years.

Caterpillar Stock Is a Growth Play and (Maybe) an Income Play

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However, an ongoing trade war, as well as a perceived economic slowdown, have weighed on Caterpillar stock. As a result, CAT stock not only has a low valuation, but is also facing questions about how long it will take to move beyond its early 2018 highs. Considering the price action of CAT stock and the state of the global economy, only income-oriented investors should buy CAT at these levels.

CAT Stock Is Primarily a Dividend Stock

Given CAT’s sector and its long-term track record, most investors who buy CAT stock will probably do so because of its dividend. The payout has risen in most years since 2003. The one exception was 2009, when the company maintained the same payout. The dividend has not been reduced since 1992.

To achieve “dividend aristocrat” status, a company must have hiked its dividend for at least 25 straight years. CAT stock does not fit this description. Still, the company’s consistent annual dividend growth since 2010 means investors can treat CAT like a dividend stock. Moreover, with a current yield of nearly 3.1%, I agree with my fellow InvestorPlace columnist, Dana Blankenhorn, that CAT stock is a buy for income investors.

But a Case for Growth Exists as Well

However, I disagree with Blankenhorn’s assessment that investors seeking  capital gains should not buy CAT stock. Investors should note that CAT stock price fell as low as $21.71 per share in 2009. At today’s price of almost $133 per share, that represents an increase of more than six-fold.

Also, CAT is very well-positioned from a competitive standpoint. It’s much larger than its competitors Terex (NYSE:TEX), CNH Industrial (NYSE:CNHI), and Komatsu (OTCMKTS:KMTUY).

Moreover, it trades at a price-earnings (PE) ratio of about 12.4. History has shown that CAT stock rarely falls to such a low multiple. Consequently,  Caterpillar stock is currently cheap.

Growth-Oriented Investors should Wait for a Pullback

Despite CAT’s low valuation, I think Caterpillar stock is less of a slam dunk for growth investors. Given current global economic conditions, CAT stock is cheap for a reason. Thanks to the U.S.-China trade war, CAT stock has fallen by nearly 18% since January 2018.

China accounts for only about 10% of Caterpillar’s revenue. Still,  an ongoing geopolitical dispute between the U.S. and China would not serve the company well.

The trade war has slowed the growth of CAT’s Construction Industries division. Also, with oil trading around $60 per barrel,the results of CAT’s Energy and Transportation unit have only been improving modestly. The one bright spot within the unit came from the Resource Industries division, whose revenue grew by 18% year-over-year. Unfortunately, the division accounts for less than 20% of CAT’s revenue.

For investors focused on growth, I would wait for a slight pullback of Caterpillar stock price. Over the last year, CAT stock price fell below the $120 per share level three times and quickly recovered each time. I see this level as its floor. I also think the ongoing trade war and concerns about the economy could easily take CAT stock back to that level. While Caterpillar stock will be a winner over the long-term, winning with CAT stock in the shorter term will take patience.

Final Thoughts on CAT Stock

At its current levels, CAT stock remains a clear winner only for dividend investors. Under current conditions, I would not discourage income investors from buying CAT right now. The current CAT stock price of around $133 per share is well above the average of the last two months. However, it still gives income investors a low-cost entry point to achieve a 3%-plus cash return.

On the other hand, investors who want both growth and income should wait. Current macro conditions and the trade war will probably keep CAT stock at a low PE ratio for the foreseeable future. Still, CAT has established a price floor just below the $120 per share level. For those with the courage to buy the shares at those levels, CAT stock could become both a growth and income play over the longer term.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.


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