This Outperforming Dividend Aristocrat Could Rally Another 22%, Says Analyst

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It's fair to say we're living in uncertain times. With tensions running hot in the Middle East and the Ukraine-Russia war stretching into its third year, the world economy also continues to face pressure from persistently high inflation due to elevated oil prices and supply chain bottlenecks.

In this type of environment, stocks that can offer some semblance of stability and reliability tend to gain popularity with investors. And this is where the “Dividend Aristocrats” come in. A title reserved for S&P 500 Index ($SPX) components that have maintained consistent annual dividend growth for at least 25 consecutive years, Dividend Aristocrats are generally considered to be fundamentally stable companies that have a stable and growing earnings base, steady cash flows, and a solid position in the market.

With this in mind, here's one outperforming Dividend Aristocrat from the industrial sector that investors might want to consider as a stable investment option in uniquely unstable times.

About Caterpillar Stock

Around since 1925, Illinois-based Caterpillar (CAT) designs, develops, manufactures, finances, and markets construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and locomotives. Its business operations are segmented into four main areas: namely, Construction Industries; Resource Industries; Energy & Transportation; and Financial Products. CAT currently commands a market cap of $179.7 billion.

Caterpillar stock is up by 21.1% on a YTD basis, significantly outperforming the broad market. By comparison, the S&P 500 is up 5.9% so far in 2024, and the Dow Jones Industrial Average ($DOWI) is nearly back to flat on the year.

Even after its noteworthy rally in 2024 so far, Caterpillar stock looks reasonably valued. Its forward price/earnings ratio is a discount to the industrial sector median, as well as CAT's own 5-year average multiple of 18.10. 

The stock's dividend yield is 1.44%, based on the current quarterly payout of $1.30 per share. Caterpillar has earned its stripes as a member of the Dividend Aristocrat club by raising those dividends consistently for the past 30 years. Moreover, its payout ratio of just 24.03% leaves plenty of headroom for continued dividend growth, backed up by solid earnings and cash flow.

CAT's Cash Flow Credentials

Caterpillar's Q4 results in early February were mixed, as EPS surpassed analysts' expectations, while revenue fell short. Revenue for the quarter came in at $17.1 billion, up 3% from the previous year. Quarterly EPS of $5.23 not only represented yearly growth of 35.5%, it came in above the consensus estimate of $4.76. Notably, the company's EPS has surpassed expectations in four out of the past five quarters.

Cash flow generation also remained strong in 2023. The company reported net cash flow from operating activities of $12.89 billion for the year, up 65.9% from the prior year. The company exited the fourth quarter with a robust cash balance of about $7 billion.

Longer term, over the past three years, Caterpillar's revenue and EPS have grown at a CAGR of 17.11% and 54.5%, respectively.

What's Driving Growth at Caterpillar?

Caterpillar has some solid growth catalysts in its repertoire. First up is its Energy & Transportation segment, which was a key driver of the Q4 earnings beat. This business has robust overall order levels from the gas and power generation categories. High energy prices are driving demand from oil & gas and power generation companies as they increase production. 

The company is also ramping up its digital capabilities with autonomous monitoring systems that leverage artificial intelligence (AI). By speeding the maintenance process and gathering data faster, CAT could see its margins and its top line expand.

More broadly, tailwinds in the overall manufacturing equipment industry bode well for Caterpillar, too. The market is projected to grow at a CAGR of more than 7% through 2033, and Caterpillar is positioned as the pre-eminent player in the industry.

What's the Analyst Forecast for CAT Stock?

Analysts remain optimistic about the stock, with an overall rating of “Moderate Buy.” Out of 21 analysts covering CAT, 7 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, 11 have a “Hold” rating, and 2 have a “Strong Sell” rating.

This group has a mean price target of $322.79 for CAT, which the stock has already surpassed. However, analysts at Jefferies set a new Street-high target for the dividend stock in a bullish note last week. The brokerage firm's freshly hiked forecast of $440 indicates that Caterpillar stock has 22.8% upside potential from Wednesday's close.

On the date of publication, Pathikrit Bose did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.