Diversification makes Caterpillar a more reliable destination
Geographical and industry diversification are the major advantage of Caterpillar Inc. (CAT). The company has repeatedly proved that it can generate high profits in difficult economic conditions. Caterpillar not only produces construction and agricultural machinery, but is also a supplier to the mining, energy, and transportation industries.
The company receives most of its revenue from the resource segment. Caterpillar’s connection with agriculture, construction, oil and gas and mining makes it a cyclical company, whose income and profit may vary depending on the situation in the global economy. However, for its investors, Caterpillar compensates for this cyclicity with stable growing dividends and a strong balance sheet.
Caterpillar is one of the few cyclical companies that has paid and raised its annual dividends for 27 consecutive years. Caterpillar’s strong point is geographical and industry diversification. This does not always help to protect against volatility, but in recent years, Caterpillar has made its business much more efficient.
The reason for the high income and free cash flow in 2021, despite the current supply chain problems, the limited labor market and COVID-19, is the reduction in costs. Capital and operating expenses have declined significantly over the past decade, but operating margins have remained high, showing that the company is converting more sales into operating profit.
Both at the peak of the US-China trade war in 2018 and at the peak of COVID-19 in 2020, Caterpillar maintained solid operating profits and proved to be a business capable of being profitable in the long run. In addition, the company can ensure a stable dividend payment, which it has been doing for almost three decades.
