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Better Buy: Caterpillar Inc. vs. United Technologies

By Dan Caplinger - Jun 20, 2017 at 4:42PM

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Which of these industrial conglomerates is a smarter stock pick?

Industrial giants Caterpillar (CAT -4.32%) and United Technologies (RTX -0.19%) are leaders in their respective industries, helping to power the U.S. economy forward. Caterpillar's heavy equipment was a must-have for construction and infrastructure development throughout much of the 20th century, while United Technologies has been a true conglomerate, pushing forward innovation in the aviation, climate control, and elevator technology fields. Both stocks suffered for a time during the cyclical downturn in the industrial sector, but future hopes for more industrial activity have pushed them to new highs. Those who are interested in the two stocks want to know which one looks more promising right now. Let's look at Caterpillar and United Technologies using a variety of key metrics to see which one might be a more ideal pick for investors.

Valuation and stock performance

Both Caterpillar and United Technologies have rebounded considerably over the past year, but Caterpillar has taken a clear edge. The heavy-equipment manufacturer has delivered a more than 40% return to shareholders since June 2016, beating out United Tech's still-impressive 20% showing.

From a valuation standpoint, comparisons between Caterpillar and United Tech are challenging because of their recent performance. United Technologies has a perfectly reasonable trailing earnings multiple of 19, but Caterpillar has reported a loss over the past 12 months, making its price-to-earnings multiple meaningless for comparison purposes.

However, when you incorporate expectations of future performance, the two companies get easier to look at side by side. Caterpillar stock has a value of just over 20 times forward earnings estimates, while United Technologies comes in a little bit cheaper, with a forward multiple of 17. Caterpillar's strong stock performance has left it a bit more highly valued than United Technologies based on these simple valuation metrics.

Caterpillar engines.

Image source: Caterpillar.

Dividends

As with all of their Dow Industrials peers, Caterpillar and United Technologies are both dividend stocks. When you compare them purely on current yield, Caterpillar comes out with an edge. Its current yield is 2.9%, compared to 2.3% for United Tech.

Yet some have been nervous about Caterpillar's dividend strategy recently. By paying its dividend while suffering losses, Caterpillar is counting on a recovery in order for its overall vision to be sustainable with respect to shareholder payouts. By contrast, United Technologies has remained conservative in its dividend policy, maintaining a payout ratio of just 40% of earnings.

In addition, Caterpillar's long-term history of dividend growth is at risk. Caterpillar last raised its dividend in July 2015, but because its 2016 total payments were higher than they were the previous year, it extended its streak of 23 consecutive years of rising payouts. United Technologies already has a legitimate 24 year streak of its own, with its most recent 7% boost set to pay out to investors in September.

Based on these numbers, both stocks look relatively equal on the dividend front. A lower dividend yield at United Tech has greater stability and visibility than Caterpillar, which needs to demonstrate its ability to keep rewarding shareholders with another dividend increase in the near future.

Growth prospects and risk

The most recent results from Caterpillar and United Technologies have been a lot more encouraging than investors had seen in past years. For Caterpillar, the company's most recent quarter included much better results than expected, including a near doubling of profits compared to the consensus forecast and solid revenue growth. Moreover, Caterpillar saw more favorable signs in its core industries going forward, prompting it to upgrade its guidance for the remainder of 2017. Some investors are nervous about the extent to which the heavy-equipment giant has paid massive amounts of money on internal restructuring, but the test of those expenses will only come once industry strength gives Caterpillar the ability to take full advantage of better conditions. Shareholders are already taking for granted that Caterpillar will be able to take maximum advantage of a turnaround in its industry. But past bets along those lines have worked out well for Caterpillar shareholders, so it's easy to understand why investors are willing to anticipate favorable results already.

For United Technologies, recent results were also promising but a bit less explosive. Sales inched higher by 3%, stemming entirely from organic growth, but adjusted earnings only managed to climb by 1% from year-earlier levels. In particular, United Tech reported strength in new equipment orders for the Otis elevator segment, equipment from the climate and controls business, and solid commercial aftermarket sales at Pratt & Whitney and UTC Aerospace Systems. The company merely repeated its guidance for 2017, however, and ongoing challenges still persist. Between the costs of research and development, unfavorable sales mixes in certain divisions, and uncertainty about future economic conditions, the jury is still out on whether United Technologies will participate fully in a new economic expansion.

Currently, Caterpillar has the more attractive combination of attributes for those shareholders willing to take greater levels of risk. Despite a higher valuation, the heavy-equipment company has more momentum and could see improving conditions more quickly than United Technologies. Still, those who are more conservative might prefer United Tech's greater stability, even if it comes at the expense of immediate future growth prospects.

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Stocks Mentioned

Caterpillar Inc. Stock Quote
Caterpillar Inc.
CAT
$197.82 (-4.32%) $-8.94
Raytheon Technologies Corporation Stock Quote
Raytheon Technologies Corporation
RTX
$90.08 (-0.19%) $0.17

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