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The Spokesman-Review Newspaper
Spokane, Washington  Est. May 19, 1883

Caterpillar’s long-term outlook makes its stock hard to ignore

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Heavy equipment maker Caterpillar (NYSE: CAT) is experiencing a few hiccups right now, but it may serve your long-term portfolio well.

It generates almost two-thirds of its revenue from international markets, and many expect great demand from China. After all, China recently announced plans to spend more than $250 billion on infrastructure. Caterpillar’s third-quarter results don’t reflect much of that spending yet, though, as it reported declining sales in China. (Growth in Australia offset much of that, demonstrating the power of diversification.) The company also reined in near-term revenue and earnings growth expectations.

Right now the best prospects for growth seem centered on domestic opportunities, where sales of equipment and machinery rose 9 percent in the third quarter. It was in resources and not construction where the greatest gains were made, though, and Caterpillar also warned that dealers report having too much inventory on hand.

Because of its global reach and its concentration in construction and mining, Caterpillar feels the effects of the global recession as harshly, if not more so, than its peers. Still, the world’s economies will eventually recover, and as they do, Caterpillar will benefit. You might keep an eye on the company, or jump in and collect a 2.4 percent dividend yield while you wait. Its five-year average dividend growth rate is about 7 percent, with plenty of room to grow.

Ask the Fool

Q: Does a company profit when I buy a share of it? And what does the share really give me? – S.U., Grand Rapids, Mich.

A: A share of stock represents a small ownership stake in a real company. If a firm has a million shares outstanding and you buy 100 of them, you own one ten-thousandth of the company.

Companies that choose to “go public” and issue stock to all interested investors via initial public offerings (IPOs) collect cash when the shares are created and initially sold. But once the shares start trading on the market between investors, the company doesn’t get a piece of those transactions. (Brokerages do, though.)

Companies do care how their stocks perform, however. A falling stock can make it easier for a firm to get bought out. A rising stock can help insiders with stock or stock options get richer.

My dumbest investment

My dumbest investment was in AT&T Wireless. I bought it at its IPO. The Facebook IPO has been giving me flashbacks. AT&T Wireless was one of the largest IPOs of all time, riding the wave of the dot-com bubble. I was clamoring for as many shares as I could get, and my broker was able to get me an extra 100. I thought I’d really scored. I bet many Facebook investors felt the same way on IPO day.

Long story short, I did have a double for a bit, but ended up selling my shares at a 50 percent loss. I did very little research; it was a stupid purchase, and I deserved to lose my money. But I’ll never forget it. – J.R., Gainesville, Fla.

The Fool responds: We sometimes learn the most valuable lessons the hard way. IPOs in general don’t outperform the overall market in their first year or two. There can be a big pop on their first day(s), which most benefits the privileged few who were allowed to buy at the opening price. After that, it’s not uncommon for the stock to slump for a long while.