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No. of Recommendations: 2
Caterpillar (NYSE: CAT) was the seventeenth stock mentioned in this post: , which makes it next up for review.

Caterpillar is an industrial company with a heavy exposure to construction and mining equipment. It's generally a pretty good economic bellwether, which these days is a pretty scary thing to think about. That makes now a great time to review the business and figure out if it's worth consideration as a potential investment.

Dividend: Caterpillar pays a dividend of $1.03 per share per quarter, an amount it elected to maintain for the quarter despite the economic craziness around it at the moment. That is the fourth quarter in a row at that dividend level, and in ordinary times, it would be fair to ask if Caterpillar would be increasing its dividend with the next payment. It profited enough in the JFM quarter to cover its dividend, but revenues and profits decreased year on year, and it expects the AMJ quarter to be worse than the JFM quarter. The company's yield is around 3.8% assuming the dividend holds. Analysts are anticipating on average earnings sufficient to cover the dividend when looking forward throughout 2020 in total, though that may well be optimistic depending on how quickly things open up and how willing to invest other businesses are. Based on its willingness and ability to continue to support its dividend for at least the time being, I'm willing to consider holding on to my Caterpillar positions for the time being.

Balance Sheet: Caterpillar has a debt to equity ratio around 2.6, a bit over $7 billion in cash and short term investments on its balance sheet, and a current ratio around 1.6. That's a solid enough balance sheet to give it a bit of breathing room to whether the Covid-19 storm for awhile, but its debt load is a little higher than I normally would like to see in an investment of mine and could get worrisome if the Covid-19 shutdown lasts too much longer. That said, it's solid enough that I'm willing to consider holding on to my Caterpillar positions for the time being.

Valuation: My valuation estimate for Caterpillar is all over the map, depending heavily on when the global economy gets back into gear and how well it's able to sustain itself on 'essential services only' type operations. Still, the midpoint of my estimates using a discounted cash flow model puts a fair value for the company at around $90 a share, a bit below its current market price of $107.29, but not so far below that I feel a compelling need to sell out based on valuation. Based on its valuation, I'm willing to hold onto the Caterpillar positions I currently own, but I would not be willing to invest new money at this time.

Next Steps: I plan to hold on to what I have at the moment. As the soonest round of options get closer to expiration, I plan to reassess the state of the economy and Caterpillar's balance sheet and determine whether to roll the options or close them.


Discovery/HR Home Fool
Disclosure: I have the following open options positions on Caterpillar: Short Jan 2022 $120 Puts, Long Jan 2021 $125 Calls, Short Jan 2021 $140 Calls. I also own Caterpillar bonds scheduled to mature in October 2021.
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