Why You Should Listen to the Big Cat Roar

Fool Investors should "go big or go home" with Caterpillar (NYSE: CAT  ) . Here's why: The world's largest heavy equipment manufacturer has what growth, income and value investors are seeking.

Growing everywhere into the Future
Even though it's the biggest company in its industry, Caterpillar continues growing from its sales, literally, from around the world. Recent earnings-per-share (EPS) growth for Caterpillar has been strong, due to its presence abroad and the strength of the agricultural sector in the United States. EPS growth for Caterpillar is higher by 67.40% from a year ago. The industry average is up only 41.70%.

For the last five years, the Big Cat has grown its sales at a 5.68% rate, creating a robust cash flow. Terex Corp. (NYSE: TEX  ) , a competitor within the capital equipment sector, saw its sales fall over the same period. The sector average for sales growth is negative. The price-to-free-cash flow for the industry is also lower than the Big Cat's. A rival in farming equipment sales, Deere & Co. (NYSE: DE  )  also has a much weaker cash flow than Caterpillar's. Caterpillar expects to continue growing at a 9.7% rate in 2013.

Company

Caterpillar

Terex Corp.

Deere & Co.

Industry Average

Price-to-Free-Cash-Flow

6.30

9.10

8.30

10.50

5-Year Sales Growth Rate

5.68%

(8.16%)

7.58%

(19.04%)

Who doesn't like a dividend check in the mail?
With a dividend yield of about 2.51%, Caterpillar offers superior income to the 2% average from the Standard & Poor's 500 Index. The Big Cat's dividend is also much higher than the industry average of 0.80%. There is plenty of cash flow to raise the dividend for Caterpillar shareholders, because the dividend payout ratio is just 21%. Historically, it's around 50% for a Standard & Poor's 500 company.

Company

Caterpillar

Industry Average

Dividend Yield

2.40%

.80%

5-year Dividend Growth Rate

7.42%

1.20%

Value now and for the future
Even with its superior growth rates, the shares of Caterpillar appear to be undervalued. The price-to-earnings growth (PEG) for a fairly-valued business should be one. The Motley Fool considers this one of the most important indicators as it measures "how the price of a company relates to its current earnings and potential growth rate." The present PEG for Caterpillar is very favorable, at only 0.66.

Buy on the dips
Even though it's a member of the Dow Jones Industrial Average, Caterpillar is a very volatile stock, with a beta of 1.86 (the average for the stock market as a whole is one). Shares of the Big Cat react vigorously to economic news, particularly from China. Foolish Investors should take advantage of these fluctuations to buy Caterpillar at a price that delivers a robust long-term total return, enhanced by a strong dividend yield.

Caterpillar is the market share leader in an industry in which size matters, and its quality products, extensive service network, and unparalleled brand strength combine to give it solid competitive advantages. Read all about Caterpillar's strengths and weaknesses in our brand new report. Just click here to access it now.

Jonathan Yates has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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