What Investors Should Know about Caterpillar’s Leverage and Liquidity
Caterpillar’s (CAT) interest expenses (excluding financial products) remained nearly consistent over the last eight quarters. For 3Q16, the company reported its interest expenses at $126 million compared to $127 million during a comparable period in 2015.
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At the end of 3Q16, Caterpillar had an interest coverage ratio (the number of times interest expenses can be paid with earnings) of 6.4x, which was up from 5.1x at the beginning of 2016.
According to company filings, Caterpillar (CAT) had ~$30.0 billion in the form of long-term debt on its books at the end of 3Q16 compared to ~$31.0 billion at the end of 2015. Notably, more than 40% of the company’s long-term debt is due to mature in the next two years.
At the end of 3Q16, CAT’s leverage (average net debt divided by EBITDA) stood at ~22.5x, which was lower than Deere & Company’s (DE) ~25.8x but was higher than AGCO’s (AGCO) ~11.0x. Astec Industries (ASTE) had a leverage ratio of less than 1.0x.
At the end of 3Q16, Caterpillar (CAT) had ~$6.1 billion in the form of cash and cash equivalents, a decrease of $347 million from year-end 2015. Also, the company’s other external consolidated credit lines with banks totaled ~$3.8 billion.
Caterpillar’s capital allocation policy could prioritize two important decisions—to maintain dividends and maintain its credit rating. The company’s dividend yield of 3.3% on January 17, 2017, is among the highest in the machinery industry (IYJ).
CAT’s ability to maintain this dividend is something that dividend-based investors will be looking at keenly. Dividends totaled ~$1.4 billion in the first nine months of 2016, representing $0.77 per share paid per quarter.
On December 14, 2016, Caterpillar announced that its board of directors voted to maintain the quarterly cash dividend of $0.77 per share of common stock, payable on February 18, 2017, to stockholders of record at the close of business on January 20, 2017.
CAT’s expected cash flows of $2.7 billion this year could be sufficient for dividend payments. Dividend payments are expected to hover around $1.8 billion.