Caterpillar (CAT) is the global leader in construction equipment manufacturing. Back in July I wrote that now is the best time to buy Caterpillar since the Great Recession.

But, things have changed since then. Caterpillar issued a troubling announcement yesterday…

The company plans to permanently reduce its workforce by between 4,000 and 10,000 workers between now and the end of 2016.

To put this into perspective, Caterpillar currently has around 114,000 employees. The company is eliminating 4% to 9% of its workforce over the course of about a year.

Healthy companies typically do not slash their work force. The truth is,Caterpillar has fallen on hard times.

The company’s stock price has declined over 11% in the last week alone.

Is Caterpillar squashed, or is now the perfect time to buy into this industry leading business?

Impatient readers can skip to the conclusion of this article.

For those who want to learn more about Caterpillar, its recent struggles, growth prospects, and dividend analysis, continue reading.

Company Overview

The company sells its equipment through a network of Caterpillar dealers.

The company operates in 4 primary divisions:

• Financial Products (6% of sales)
• All Other Segments (5% of sales)
• Resource Industries (16% of sales)
• Construction Industries (36% of sales)
• Energy & Transportation (37% of sales)

Note: All sales percentages are from the company’s 2nd quarter of 2015 results.

The Financial products segment provides financing services to Caterpillar’s customers and dealers.

The ‘all other segments’ division is a catch-all that includes several of Caterpillar’s smaller operations, that includes the following:

• Paving products
• Parts distribution
• Forestry products
• Remanufacturing
• Industrial & waste products

The resource industry division primarily serves the mining and quarrying industries. The construction division serves the infrastructure and building construction industries. The energy & transportation division serves the power generation, industrial, oil & gas, and transportation industries.

Geographically, Caterpillar’s revenue breaks down as follows:

• EAME (24%)
• Asia/Pacific (18%)
• Latin America (10%)
• North America (47%)

Note: EAME stands for Europe, Africa, and Middle-East. All numbers are from the company’s 2nd quarter of 2015.

Clearly, Caterpillar is a globally diversified company with only half of its revenue coming from the United States.

Growth Prospects & Recent Struggles

Over the long run, having significant exposure to developing and emerging markets will give Caterpillar faster growth than if it were concentrated only in the developed world.

Right now, however, the company’s global reach is hurting it. The United States dollar has greatly appreciated versus most other currencies, and growth is slowing in China, Brazil, and other developing & emerging countries.

To make matters worse, Caterpillar is suffering from low oil & gas and mineral prices. The combination of falling commodity prices, slowing growth in the developing world, and a strong United States dollar have created ‘the perfect storm’.

Despite all the negativity surrounding Caterpillar, the company has performed very well over long periods of time.

From 1999 through 2014, Caterpillar compounded its earnings-per-share at 11.1% a year. In addition, the company has managed to increase margins over time.

In 2005, Caterpillar’s operating margin was 16.6%. In fiscal 2014, it was 19.5%.

Over a full economic cycle, Caterpillar will likely grow earnings-per-share by at least 7% a year. That’s a very conservative estimate. I believe it is more likely the company compounds its earnings-per-share at closer to 10% a year.

The growth drivers for Caterpillar are:

• Share repurchases
• Increased efficiency (higher margins)
• Global growth, especially in developing markets

Dividend & Valuation Analysis

When investors think of cyclical companies’ dividends, they often think of dividend cuts… Caterpillar has paid steady or increasing dividends for 33 consecutive years, despite having a highly cyclical business model.

The company’s most recent dividend increase was for 10%. Further, Caterpillar is currently trading for a dividend yield of 4.7%. The image below shows the company’s dividend history over the last 20 years. It is a rare opportunity to be able to purchase Caterpillar stock at such a high dividend yield:

Caterpillar is currently trading for a price-to-earnings ratio of just 11.3. The company is offering long-term investors total returns of 11.7% to 14.7% a year from growth (7% to 10%) and dividends (4.7%). It is uncommon to find a high quality blue chip stock offering such high total returns. Click here to see other undervalued blue chip stocks.

At current prices, Caterpillar is significantly undervalued.

Final Thoughts

Caterpillar is not squashed.

The company is simply too profitable, too successful, and too well-managed to fail any time in the foreseeable future.

The time to buy a stock is not when the future is rosy. Rather, buy when a company is in temporary trouble.

“The best thing that happens to us is when a great company gets into temporary trouble…We want to buy them when they’re on the operating table.”

– Warren Buffett

Caterpillar’s excellent total return potential, long history of dividends, high dividend yield, and low valuation make it a favorite of The 8 Rules of Dividend Investing. The stock is most certainly a buy for investors who can withstand stock price volatility.