# Caterpillar Inc. (CAT)

## Dividend Discount Model (DDM)

Medium level of difficulty

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Dividends are the cleanest and most straightforward measure of cash flow because these are clearly cash flows that go directly to the investor.

### Intrinsic Stock Value (Valuation Summary)

Caterpillar Inc., dividends per share (DPS) forecast

US\$

Year Value DPSt or Terminal value (TVt) Calculation Present value at 16.52%
0 DPS01 3.28
1 DPS1 3.27 = 3.28 × (1 + -0.27%) 2.81
2 DPS2 3.38 = 3.27 × (1 + 3.29%) 2.49
3 DPS3 3.61 = 3.38 × (1 + 6.85%) 2.28
4 DPS4 3.99 = 3.61 × (1 + 10.41%) 2.16
5 DPS5 4.54 = 3.99 × (1 + 13.96%) 2.12
5 Terminal value (TV5) 202.68 = 4.54 × (1 + 13.96%) ÷ (16.52%13.96%) 94.37
Intrinsic value of Caterpillar Inc.’s common stock (per share) \$106.23
Current share price \$146.34

Based on: 10-K (filing date: 2019-02-14).

1 DPS0 = Sum of the last year dividends per share of Caterpillar Inc.’s common stock. See details »

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

### Required Rate of Return (r)

 Assumptions Rate of return on LT Treasury Composite1 RF 2.31% Expected rate of return on market portfolio2 E(RM) 11.55% Systematic risk of Caterpillar Inc.’s common stock βCAT 1.54 Required rate of return on Caterpillar Inc.’s common stock3 rCAT 16.52%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

3 rCAT = RF + βCAT [E(RM) – RF]
= 2.31% + 1.54 [11.55%2.31%]
= 16.52%

### Dividend Growth Rate (g)

#### Dividend growth rate (g) implied by PRAT model

Caterpillar Inc., PRAT model

Average Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Selected Financial Data (US\$ in millions)
Dividends declared 1,985  1,845  1,802  1,781  1,662
Profit (loss) attributable to common stockholders 6,147  754  (67) 2,102  3,695
Sales of Machinery, Energy & Transportation 51,822  42,676  35,773  44,147  52,142
Total assets 78,509  76,962  74,704  78,497  84,681
Equity attributable to common stockholders 14,039  13,697  13,137  14,809  16,746
Financial Ratios
Retention rate1 0.68 -1.45 0.15 0.55
Profit margin2 11.86% 1.77% -0.19% 4.76% 7.09%
Asset turnover3 0.66 0.55 0.48 0.56 0.62
Financial leverage4 5.59 5.62 5.69 5.30 5.06
Averages
Retention rate -0.02
Profit margin 5.06%
Asset turnover 0.57
Financial leverage 5.45

Dividend growth rate (g)5 -0.27%

Based on: 10-K (filing date: 2019-02-14), 10-K (filing date: 2018-02-15), 10-K (filing date: 2017-02-15), 10-K (filing date: 2016-02-16), 10-K (filing date: 2015-02-17).

2018 Calculations

1 Retention rate = (Profit (loss) attributable to common stockholders – Dividends declared) ÷ Profit (loss) attributable to common stockholders
= (6,1471,985) ÷ 6,147 = 0.68

2 Profit margin = 100 × Profit (loss) attributable to common stockholders ÷ Sales of Machinery, Energy & Transportation
= 100 × 6,147 ÷ 51,822 = 11.86%

3 Asset turnover = Sales of Machinery, Energy & Transportation ÷ Total assets
= 51,822 ÷ 78,509 = 0.66

4 Financial leverage = Total assets ÷ Equity attributable to common stockholders
= 78,509 ÷ 14,039 = 5.59

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= -0.02 × 5.06% × 0.57 × 5.45 = -0.27%

#### Dividend growth rate (g) implied by Gordon growth model

g = 100 × (P0 × rD0) ÷ (P0 + D0)
= 100 × (\$146.34 × 16.52% – \$3.28) ÷ (\$146.34 + \$3.28) = 13.96%

where:
P0 = current price of share of Caterpillar Inc.’s common stock
D0 = the last year dividends per share of Caterpillar Inc.’s common stock
r = required rate of return on Caterpillar Inc.’s common stock

#### Dividend growth rate (g) forecast

Caterpillar Inc., H-model

Year Value gt
1 g1 -0.27%
2 g2 3.29%
3 g3 6.85%
4 g4 10.41%
5 and thereafter g5 13.96%

where:
g1 is implied by PRAT model
g5 is implied by Gordon growth model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= -0.27% + (13.96%-0.27%) × (2 – 1) ÷ (5 – 1) = 3.29%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= -0.27% + (13.96%-0.27%) × (3 – 1) ÷ (5 – 1) = 6.85%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= -0.27% + (13.96%-0.27%) × (4 – 1) ÷ (5 – 1) = 10.41%