Caterpillar Stock Gives Income Investors a Feast on Agriculture’s Problems

Once upon a time, some of America’s greatest companies were based in what looked like the middle of nowhere.

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Along I-74 in western Illinois, the squat home office of Caterpillar (NYSE:CAT) dominated the Peoria skyline. Off I-72, to the southeast, Archer Daniels Midland (NYSE:ADM) ruled the small town of Decatur.

Both HQs have since decamped to Chicago, but there’s big trouble back home. The trade war is unhealthy for the farm economy. Vendors like CAT and ADM aren’t getting bailouts like the ones offered to their farmer clients.

Thus, these stocks are now among the worst performers, or the biggest bargains, Wall Street has to offer. Caterpillar is down almost 13% over the last year. ADM is down almost 25%.

Is it time to give these old farm dogs another look?

Caterpillar Grows Dividend

On the surface Caterpillar looks like a screaming bargain.

With a market cap of $69.5 billion, on sales of $54 billion, Caterpillar sports a price-earnings multiple of just 11x with a newly raised dividend of $1.03 per share yielding 3.25%.

Caterpillar makes more than farm equipment. Its equipment is also heavily used in construction. China is one of its biggest markets, and the stock took another leg down July 24 after it reported a profit of $1.6 billion, $2.83 per share fully diluted, on revenue of $14.4 billion. 

Caterpillar is a slow-growth company. Investors buy it for the dividend. During the second quarter the company earned that dividend nearly three times over. There was also $7.4 billion in cash on the books at the end of June. The dividend costs just $600 million per quarter.

Caterpillar has been paying dividends continuously since 1981. The dividend has been boosted regularly and was just 70 cents per share five years ago. Before its latest hike last month, the dividend rate was 86 cents.

But ask analysts about Caterpillar and they say sell. The chart pattern looks bearish in the short term, bearish in the medium term, bearish in the long run. Caterpillar is America’s most successful maker of gas-powered engines. Even their mobile electric generators run on diesel. Can that really be a buy in the 2020s?

ADM No Longer Amuses

Archer Daniels Midland, meanwhile, looks like a disaster area.

ADM bet that the trade war would end quickly. It has lost that bet. On June 30 the company announced earnings of $325 million, 42 cents per share fully adjusted, on revenue of $16.3 billion. The earnings were barely enough to pay the 35-cents a share dividend, with its 3.4% yield.

Analysts were not amused. The earnings were down 41% from a year earlier. Bad spring weather was added to the China woes. Shares dropped by $2 each, and are since down another $2, the shares due to open below $38.

The trade war and competition with other fuels is killing ADM’s ethanol business. The company believes the China soybean market may be “closed for good” and it must find other markets for U.S. grain.

Bottom Line on Ag-Related Dividend Stocks

For income investors, market downturns can be a picnic. Prices go down and yields go up.

But you must watch out for the ants, the bugs in the business model that put the dividend at risk.

For Caterpillar, the bug is the complete lack of an electrification strategy. That may not look like trouble now, but such machines are coming. Fortunately, management has time and cash to deal with this, if it chooses to do so.

ADM’s problems are more basic, its margin of safety smaller. There’s real trouble in the grain belt, where ADM creates markets. ADM helped create both the ethanol market and the corn syrup market. Can it turn America’s grain surplus into meat?

For now, ADM has the fatter yield, but CAT is the better bet.

Dana Blankenhorn is a financial and technology journalist. He is the author of the mystery thriller, The Reluctant Detective Finds Her Family, available at the Amazon Kindle store. Write him at or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.

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