Caterpillar (NYSE:CAT) Stock a Buy: Constructing Gains for Your Portfolio

Industrial companies that produce things like machinery, equipment, or manufacturing supplies were written off by many investors this year after the Coronavirus crash in March. Since lots of these businesses are cyclical and thrive in a strong economy, the sector has been lagging the overall market. Although many are still waiting to see how things play out with the economy, we are starting to see some positive data and money flowing into industrial stocks again. Now might be a smart time to start looking at companies in the sector since they could see a large uptick in demand shortly.

Whenever a company rallies after releasing poor quarterly earnings, investors should pay attention. That’s exactly the case with Caterpillar (NYSE:CAT), a company that manufactures and sells construction and mining equipment. The company’s earnings have been negatively impacted by the global pandemic, but the stock remains one of the strongest companies in the industrial sector and is looking more and more like a buy these days. Let’s take a look at a few reasons why Caterpillar is a great industrial stock to consider adding to your portfolio at this time.

World’s Largest Producer of Earth-Moving Equipment

The strategy of buying industry-leading companies that are strong financially tends to pay off in the long-term for investors. That’s exactly why Caterpillar stock is looking strong even during a tough time for the economy. Caterpillar’s instantly recognizable yellow machines are found all over the world, with 52% of the company’s revenues coming from outside of the U.S. in 2019. The company produces machinery that is used in infrastructure and building construction along with mine and quarry applications. Caterpillar’s business also includes segments like energy, transportation, and financial products.

If you think about what drives Caterpillar’s revenues, things like global economic growth, construction activity, commodity prices, and government spending all play key roles. That’s why the company has been hurting in the short term. In Q2, Caterpillar saw a 31% year-over-year decrease in revenue primarily driven by lower sales volume. EPS was down 63% year-over-year in Q2 as well. With that said, a cyclical recovery could be coming sooner than you think. Caterpillar’s experienced management team and financial stability make it a company that is well-positioned to deal with the short-term impacts of the pandemic. The stock is up 10% since the earnings report and might be in for more upside soon. If the economic recovery occurs faster than anticipated, investors could be handsomely rewarded.

Strong Dividend Growth History

One of the best selling points about Caterpillar is its strong balance sheet which has allowed the company to reward investors with incredibly consistent dividend growth. The company has paid out a dividend every year over the last 87 years and also has increased its dividend for 26 consecutive years. That makes the company a member of the elite “dividend aristocrat” club. During a time when many companies are cutting their dividends or at risk of doing so, investing in a reliable dividend payer makes a lot of sense.

The stock currently offers a dividend yield of 2.82% and investors should be encouraged by the company’s strong financial position. Caterpillar reported $8.8 billion in enterprise cash on its balance sheet at the end of Q2 and $18.5 billion in liquidity. That’s very attractive for dividend investors that are looking for reliable cash flows at this time.

Potential Benefits from Weak U.S. Dollar and the Election

Two things might benefit Caterpillar that many investors are overlooking at this time. With the Federal Reserve targeting 2% inflation and keeping interest rates at 0% for the foreseeable future, Caterpillar will likely see improved sales from international markets. That’s because a weaker U.S. dollar means that American exports are more affordable. We already mentioned that 52% of the company’s revenues came from outside of the U.S. in 2019, which is something to keep in mind in the current fiscal environment. The current low-interest-rate environment could also be advantageous for mining companies and construction companies, which is great for Caterpillar as well.

The second potentially positive catalyst for Caterpillar to monitor in the coming months is the election. While it’s tough to predict who will come out on top this November, should Donald Trump end up getting reelected, you can expect a lot of government infrastructure spending. President Trump has previously mentioned Caterpillar in a positive light several times over the years. Regardless of who wins the election, this stock should benefit from an emphasis on rebuilding the economy.