CAT vs DE: Dividend Comparison for Investors

CAT vs DE: Quick Overview

Caterpillar (CAT) and Deere & Company (DE) are two titans of the industrial sector, renowned for their iconic machinery that builds and feeds the world. Caterpillar, with its signature yellow equipment, is a global leader in construction, mining, and energy. Deere, famous for its green and yellow tractors, is the undisputed king of agricultural machinery. For dividend investors, both companies represent compelling, long-term investments rooted in essential global industries. They are both mature, blue-chip companies with long histories of rewarding shareholders. This comparison will delve into their business models, dividend track records, financial health, and valuation to help you understand which of these industrial giants might be a better fit for your dividend growth portfolio.

Company Profiles

While both companies operate within the Industrials sector and the Agricultural & Machinery industry, their primary end markets create a key distinction for investors.

Caterpillar Inc. (CAT)

Founded in 1925 and public since 1929, Caterpillar is a globally diversified manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives. Its business is typically broken down into three main segments:

• Construction Industries: This is what most people think of when they hear Caterpillar. It includes machinery for infrastructure, forestry, and building construction, such as backhoes, excavators, and wheel loaders.
• Resource Industries: This segment supports mining and quarrying customers with massive equipment like electric rope shovels, draglines, and large mining trucks.
• Energy & Transportation: CAT provides engines, turbines, and locomotives for industries including oil and gas, power generation, marine, and rail.

Caterpillar's business is highly cyclical and closely tied to global economic growth, commodity prices, and infrastructure spending.

Deere & Company (DE)

Deere & Company, founded in 1837 and public since 1972, is the world's leading manufacturer of agricultural equipment. While it also produces construction and forestry machinery, its identity and primary revenue driver are firmly planted in the farm.

• Production and Precision Ag: This is Deere's largest segment, offering large-scale farm equipment like tractors, combines, and sprayers. It's also a leader in precision agriculture technology, which uses GPS, IoT sensors, and data analytics to help farmers increase yields and reduce costs.
• Small Ag and Turf: This segment focuses on smaller tractors, riding lawn equipment, and commercial mowers for homeowners, landscapers, and golf courses.
• Construction and Forestry: Similar to CAT, this division produces a range of equipment for construction and logging, though it's a smaller part of Deere's overall business.

Deere's performance is heavily influenced by factors like crop prices, farm income, and global food demand.

Dividend Comparison

For dividend investors, the numbers tell a crucial story. Here’s how CAT and DE stack up on key dividend metrics.

Yield and Payout Ratio

Both companies currently offer similar, relatively modest dividend yields. Their payout ratios are very healthy and conservative, sitting below 30%. This low ratio indicates that earnings comfortably cover the dividend payments, leaving significant capital for reinvestment into the business, share buybacks, and future dividend increases. It provides a substantial margin of safety, which is highly attractive to conservative dividend investors.

Dividend Growth

This is where a key difference emerges. While Caterpillar is a Dividend Aristocrat with over three decades of consecutive dividend increases, its growth rate has been steady but slower. Deere, while not an Aristocrat, has rewarded shareholders with a much faster dividend growth rate over the past five years, more than doubling CAT's pace. This makes DE a compelling choice for investors prioritizing rapid income growth.

Investors can use tools like DripEdge to track these dividend growth rates over time and simulate how different growth assumptions could impact their future passive income streams from either stock.

Financial Health

A sustainable dividend is built on a foundation of strong financial health. Let's compare their core financial metrics.

Revenue and Earnings Growth

Historically, both companies have seen revenues and earnings fluctuate with the economic cycles of their respective industries. Over the last five years, Deere has exhibited stronger top-line revenue growth, largely driven by a strong agricultural cycle and the successful rollout of its precision ag technology. Caterpillar's growth has been more modest, reflecting a mixed global environment for construction and mining.

Debt-to-Equity

Both CAT and DE carry what appears to be a high debt-to-equity ratio. However, this is common for industrial companies that have large financial services divisions (e.g., Cat Financial and John Deere Financial). These arms provide financing to customers to purchase their expensive equipment. When analyzing their balance sheets, it's important to separate the industrial operations from the financing operations. Both companies maintain investment-grade credit ratings, suggesting their debt loads are manageable.

Free Cash Flow (FCF)

Free cash flow is the lifeblood of the dividend. It's the cash left over after a company pays for its operating expenses and capital expenditures. Both Caterpillar and Deere are strong FCF generators. Their ability to consistently produce cash through economic cycles is a primary reason they can maintain and grow their dividends so reliably.

Valuation

Valuation metrics help determine if a stock is fairly priced. We'll look at the Price-to-Earnings (P/E) and Price-to-Book (P/B) ratios.

• P/E Ratio: Deere has recently traded at a lower P/E ratio than Caterpillar, suggesting it may be cheaper relative to its trailing earnings. However, both companies trade at P/E ratios below the S&P 500 average, indicating they are not excessively valued.
• Forward P/E: Looking at forward P/E ratios, which are based on earnings estimates, the valuation gap often narrows. The forward P/E can be more useful for cyclical companies, as it attempts to look past the current peak or trough in earnings.
• Price-to-Book (P/B): Both companies trade at a significant premium to their book value, which reflects their strong brand equity, market leadership, and intangible assets like technology and dealer networks.

Valuations for both stocks will fluctuate, so investors should always check the latest metrics before making a decision.

Which Is Better for Dividend Investors?

There is no single "better" stock; the choice depends on your individual investment goals and risk tolerance.

A case for Caterpillar (CAT) could be made if you:

• Prioritize dividend safety and consistency above all else. Its Dividend Aristocrat status is a testament to its commitment to shareholders through multiple economic downturns.
• Want broad exposure to the global economy, including infrastructure, energy, and mining.
• Are comfortable with a slower, more deliberate dividend growth rate in exchange for a proven 30+ year track record.

A case for Deere & Company (DE) could be made if you:

• Are seeking higher dividend growth and are willing to forgo the official "Aristocrat" title.
• Believe in the long-term secular tailwinds of global population growth and the need for increased food production efficiency (the "feed the world" thesis).
• Are optimistic about the adoption of high-tech farming solutions and automation.

Can You Own Both?

Absolutely. While both CAT and DE are in the industrial sector, they offer diversification benefits from each other. Caterpillar's fortunes are tied to global GDP, construction projects, and commodity extraction. Deere's are linked more closely to the agricultural cycle, farm income, and food demand. Owning both can provide a more balanced exposure to the industrial economy, smoothing out the cyclicality of their individual end markets. An investor could hold CAT as a stable, core dividend anchor and DE as a position with higher growth potential.

FAQ

Is Caterpillar or Deere a Dividend Aristocrat?

Caterpillar (CAT) is a Dividend Aristocrat, an S&P 500 company that has increased its dividend for at least 25 consecutive years. CAT has raised its dividend for 31 straight years. Deere & Company (DE) is not a Dividend Aristocrat, but it has a strong history of dividend payments and has raised its dividend for over 20 consecutive years.

Which company is more exposed to global economic cycles?

Caterpillar is generally considered more exposed to broad global economic cycles. Its revenue is heavily dependent on large-scale construction, infrastructure spending, mining activity, and energy prices, all of which are highly sensitive to global GDP growth. Deere is also cyclical, but its primary driver is the agricultural economy, which can sometimes run on a different cycle than the broader economy.

How does technology and automation affect CAT and DE?

Both companies are heavily investing in technology to create "smart" machinery. Deere is a leader in precision agriculture, using GPS guidance, IoT sensors, and data analytics to automate farming tasks and maximize crop yields. Caterpillar is a leader in autonomous hauling for mining operations and is developing advanced telematics and remote-control capabilities for its construction equipment. For both, technology is a key driver of future growth and a major competitive advantage.

Disclaimer: The information provided is for educational and informational purposes only and does not constitute financial, investment, or legal advice. DripEdge is not a registered investment advisor. Past performance does not guarantee future results. Always do your own research or consult a qualified financial professional before making investment decisions.