Please ensure Javascript is enabled for purposes of website accessibility

Better Buy: Caterpillar Inc. vs. United Technologies

By Dan Caplinger – Mar 23, 2016 at 4:33PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

These two industrial behemoths have both struggled, but which has a more promising future?


Image: United Technologies.

The American economy was built on the back of heavy industry, and both Caterpillar (CAT 0.55%) and United Technologies (RTX 1.32%) have long histories in producing essential equipment that has helped drive economic growth for decades. More recently, though, both United Technologies and Caterpillar have seen their stocks come under pressure, and many investors fear that macroeconomic conditions for the two companies could get worse before they get better.

Some value investors have become interested in the stocks, but they still wonder which one is the better buy right now. Let's look at how Caterpillar and United Technologies compare on some key metrics to see which one might be a smarter pick for investors.

Valuation
Both Caterpillar and United Technologies have seen their shares lose ground during the past year. Since March 2015, Caterpillar shares are down about 3%, while United Technologies is down 15%.

It's natural to expect that a sizable drop in stock price can give a company a more-attractive valuation, but a closer look at United Technologies and Caterpillar shows other factors at work, as well. United Technologies trades at just 11 times trailing earnings compared to a much-richer 21 times trailing earnings for Caterpillar.

Yet some fears about United Technologies' future earnings trajectory is at least partially to blame for the disparity, because many investors expect United Technologies to post bottom-line declines between now and 2017. On a forward basis, Caterpillar's earnings multiple remains near 21, but United Technologies trades at more than 14 times forward earnings. Still, that difference is wide enough to give United Technologies the advantage.

Dividends
Dividend investors like to see current income, and Caterpillar easily takes the prize on the dividend-yield front. The heavy-equipment specialist currently has a yield of 4% compared to United Technologies' solid 2.6% dividend yield.

A substantial portion of the difference relates to how the two companies allocate capital. United Technologies has a much more sustainable payout ratio of just 57%, and that compares favorably to the 84% payout ratio that Caterpillar currently has.

Moreover, when it comes to dividend growth, both companies have demonstrated a long-term commitment to shareholders. The two each have a 22-year streak of consecutive increases in annual dividend payouts, putting them in line to become the newest members of the prestigious Dividend Aristocrats within the next few years. Caterpillar's higher yield gives it a slight advantage, but both companies have good track records on the dividend front.

Growth
One big question facing Caterpillar and United Technologies is what will happen with their businesses. Caterpillar has continued to see sales plunge, reporting a 23% drop in revenue in its most-recent quarter stemming largely from the Energy and Transportation business. Natural resources and construction also suffered, and Caterpillar doesn't expect near-term relief, projecting another 10% drop in revenue for 2016. Yet recent turns in the commodity market have created at least a little optimism among investors who've patiently waited for Caterpillar's exposure to the energy and mining industries to stop weighing so heavily on its financial performance.

United Technologies also had a tough 2015. Full-year sales fell 3%, and operating profits dropped by nearly a quarter. The sale of the Sikorsky helicopter division led to a radical transformation for the conglomerate, and fears that the aerospace industry's fast pace of growth might have topped out led to the share-price declines that United Technologies saw throughout much of the year. Looking ahead, though, United Technologies remains hopeful that its strategic moves will bear fruit and produce revenue gains even in a tough environment in 2016.

For investors looking at both stocks, whether Caterpillar or United Technologies is the better buy depends on your time frame. United Technologies has a much clearer road ahead, and as long as aerospace remains strong, it has the potential to keep producing steady gains.

Caterpillar, meanwhile, is still suffering in many of its core industries, but it has a much greater capacity for a bounce when conditions improve. All told, United Technologies gets the nod here for being the better buy for most investors.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

Invest Smarter with The Motley Fool

Join Nearly 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Caterpillar Stock Quote
Caterpillar
CAT
$236.41 (0.55%) $1.29
Raytheon Technologies Stock Quote
Raytheon Technologies
RTX
$98.72 (1.32%) $1.29

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
349%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.