3 Dividend Growth Stocks to Buy on Infrastructure Spending - Cabot Wealth Network

3 Dividend Growth Stocks to Buy on Infrastructure Spending

Written by Bob Ciura for Sure Dividend

After months of negotiations, President Biden signed a $1 trillion bipartisan infrastructure bill this week.

Among other investments, this fiscal package includes: $110 billion for repairing the aging highways, bridges and roads of the country; $65 billion for internet access; $65 billion on modernizing the electric grid; and $25 billion for airports.

The huge infrastructure bill will provide a strong tailwind to infrastructure stocks.

In this article, we will analyze the prospects of three infrastructure stocks which are ideally positioned to benefit from the new infrastructure plan.

Infrastructure Stock: Caterpillar (CAT)

Caterpillar is the largest manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives in the world. The company has a market capitalization of $113 billion and operates primarily in three segments: Construction Industries, Resource Industries and Energy & Transportation.

Caterpillar greatly benefits from the ongoing economic recovery from the pandemic, which has resulted from the massive vaccine rollout. Its customers cut drastically their investments last year due to the severe recession caused by the pandemic but they have resumed their investment projects at a fast pace this year.

This was clearly reflected in the latest earnings report of Caterpillar. The company grew its revenue 25% over last year’s quarter, with more than 20% growth in all its segments. As a result, it grew its earnings per share 75%, from $1.52 to $2.66, and exceeded the analysts’ consensus by an impressive $0.45.

It was the sixth consecutive quarter in which Caterpillar exceeded the analysts’ expectations by a wide margin.

Caterpillar will greatly benefit from the infrastructure bill. Its customer portfolio includes a great number of construction and energy companies. As a result, Caterpillar will enjoy a significant increase in its revenues and earnings thanks to these investments.

Caterpillar has managed to grow its dividend for 28 consecutive years. This is an enviable record for a cyclical company. Caterpillar is on the exclusive Dividend Aristocrats list.

Given its healthy payout ratio of 42% and its promising growth prospects, its dividend has a wide margin of safety. Therefore, its 2.2% dividend should be considered safe for the foreseeable future.

Infrastructure Stock: Nucor (NUE)

Nucor is the largest publicly traded U.S. steel producer. Nucor is currently thriving thanks to the global economic recovery from the pandemic. The impressive pent-up demand from the construction industry combined with low steel inventories has led the price of steel to rally to new all-time highs this year.

As the price of steel is by far the greatest determinant of the earnings of Nucor, it has led the company to post record earnings this year. In the most recent quarter, its steel shipments grew 13% over last year’s quarter and its earnings per share jumped more than 10-fold, from $0.63 to an all-time high of $7.28.

Nucor is on track to grow its annual earnings per share more than 5-fold this year, from $4.40 to $22.95, which is an eye-opening record, as the previous record of the company was only $7.64.

As steel prices are highly cyclical, it is prudent to expect them to correct towards their historical average at some point in the future. Such a trend will provide a headwind to Nucor. However, Nucor is ideally positioned to profit from the new infrastructure bill.

Steel is a major component in buildings, cars, trains and infrastructure and hence the new investments will significantly benefit the business of Nucor.

Just like most commodity producers, Nucor is a highly cyclical stock. Its earnings are extremely sensitive to the price of steel, which is notoriously cyclical.

On the other hand, Nucor has grown its dividend for 48 consecutive years. This is an admirable achievement, given the cyclicality of this business. Given the solid payout ratio of 32% of the company and its rock-solid balance sheet, its dividend should be considered safe for the foreseeable future.

Infrastructure Stock: Union Pacific (UNP)

Union Pacific is the largest railroad company in the country and operates more than 32,000 miles of rail throughout the western two-thirds of the country. Union Pacific transports industrial and agricultural products, as well as coal and chemicals.

Union Pacific currently enjoys a strong tailwind, namely the robust economic recovery from the coronavirus crisis. This tailwind is offering a double boost in the earnings of the railroad company; increased volumes and higher prices thanks to strong demand.

In the third quarter, the company grew its revenue 14% thanks to 4% volume growth and a 9% increase in its average revenue per car load. As a result, its earnings per share grew 28%, from $2.01 to $2.57, and exceeded the analysts’ consensus by $0.07.

Union Pacific will certainly benefit from the aforementioned infrastructure package. The demand for metals and minerals will increase thanks to higher construction activity. In addition, the fiscal package will provide a boost to the overall economic growth and hence it will provide a tailwind to the house market. As a result, the demand for transportation of forest products is likely to improve.

Union Pacific is the largest railroad in the U.S. and thus has a dominant position, with strong pricing power. As a result, it has grown its earnings per share by 9% per year on average over the last decade.

Even in 2020, which was marked by the fierce coronavirus crisis, Union Pacific saw its earnings per share decrease only 3%. Even better, it is on track to post record earnings this year.

Union Pacific stock has a 1.8% dividend yield and has raised its dividend for 14 consecutive years. Given its healthy payout ratio of 43%, its solid balance sheet and its resilience to recessions, its dividend has a wide margin of safety.

Final Thoughts

Due to the recently signed major infrastructure bill, it is only natural that investors wonder which stocks will benefit the most from this bill. Caterpillar, Nucor and Union Pacific will definitely enjoy a boost in their businesses thanks to this fiscal package.

All 3 stocks pay dividends to shareholders, and have long histories of raising their dividend payouts over time. The infrastructure bill stands as a major growth catalyst for all three of these infrastructure stocks.

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