Analyst: Dividends at risk at Caterpillar, Eaton

NEW YORK, July 9 Thu Jul 9, 2009 12:41pm EDT

NEW YORK, July 9 (Reuters) - Caterpillar Inc (CAT.N) and Eaton Corp (ETN.N) may soon join other industrial companies in cutting their dividends, now that truckmaker Paccar (PCAR.O) has slashed its payout in half, according to a Merrill Lynch analysis.

Paccar's cut of its quarterly dividend this week to 9 cents per share to conserve cash was a surprise, Merrill analyst Andrew Obin said in a research note on Thursday. Paccar's move follows dividend reductions at CNH Global NV CNH.N, Timken Co (TKR.N), and Ingersoll-Rand Plc (IR.N). Ingersoll in March cut its quarterly dividend to 7 cents a share, from 18 cents.

"We think that Caterpillar and Eaton stand out as two other names at risk of reducing their dividend rate" in the second half of 2009, Obin wrote, citing the companies' above-average debt levels and pension obligations.

Caterpillar could cut slash quarterly dividend to 10 cents a share from 42 cents, according to Merrill.

Caterpillar and Eaton each currently yield about 5 percent, well above their historical average of 2.3 percent and 3.2 percent, respectively.

By comparison, a group of 10 industrial names is yielding about 2.4 percent, slightly below the long-term average. The overall Standard & Poor's 500 index .SPX currently yields about 3.1 percent.

Caterpillar spokesman Jim Dugan said the company does not comment on analyst reports. Eaton's Kelly Jasko declined to comment, citing the quiet period before earnings.

In March, Eaton CEO Sandy Cutler told Reuters he was "comfortable" with Eaton's dividend, then at about 6 percent, even though it was among the highest in its peer group. [ID:nN05341142]

Eaton is scheduled to report quarterly results on Monday July 20th, with Caterpillar reporting the following day.

"While we do think the dividend cut would be a prudent measure by the two companies given limited visibility on the pace of end-market recovery and is somewhat anticipated by the market ... we do highlight it as a potential overhang on (shares) in the near term," Obin said in the research note.

Caterpillar was up 19 cents at $30.77 in midday trading, while Eaton was down 12 cents to $40.86, both on the New York Stock Exchange. (Reporting by Nick Zieminski; editing by Gunna Dickson)

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