Where There's a Will... There's a Way

Since the release of their quarterly earnings on April 21, and given managements’ statements regarding their full year outlook, there has been some speculation regarding whether Caterpillar, Inc. (CAT) will cut their dividend.

While a cut is always a possibility, a quick glance at their financials would seem to indicate that if they have the will, there is no need for a dividend cut at this juncture. Here is why:

1. CAT had over $3.5 billion in cash on their balance sheet at the end of Q1-09, an increase of $830 million from the end of 2008. In Q1-09 they paid out $253 million in dividends. This translates to roughly 14 quarters of dividend coverage at current levels.
2. Both Operating Cash Flow and Free Cash Flow were positive and were higher in Q1-09 than in Q1-08. The Dividend Payout Ratio on these two metrics was 28% and 38% respectively versus 32% and 61% in Q1-08.
3. CATs’ current ratio improved from 1.21 at the end of Q4-2008 to 1.34 at the end of Q1-2009

So while CATs’ current outlook for a full year profit of $1.25 before redundancy costs throws up the red flag of earnings being less than their annual dividend (currently at $1.68), their financial condition would seem to indicate that they have enough headroom to weather the current economic cycle without reducing the dividend… if they have the will.