Caterpillar Stock Keeps Inching Along. Is It a Good Buy for Steady Growth?

Key Points

• Caterpillar is the world’s largest manufacturer of construction equipment.

• Its total returns have bulldozed the S&P 500 over extended time horizons.

• It has an industry-leading position, strong performance, and growing dividends.

• 10 stocks we like better than Caterpillar ›

Like its massive earth-moving machines, Caterpillar (NYSE: CAT) just keeps chugging along. While Caterpillar might not have the glitz and pizzazz of an AI start-up, it's been quietly outperforming the S&P 500 this year -- and bulldozing the broader market over longer time horizons.

Against the backdrop of a tariff war and simmering geopolitical tensions, Caterpillar is up 17% this year, outpacing the S&P 500's 11% gain as of Sept. 4. Over the past decade, the big cat has delivered total returns of 618%, doubling the returns of the S&P 500.

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Should investors expect Caterpillar to continue delivering strong returns over the long haul? Let's take a look under the hood of this manufacturing giant.

Image source: Caterpillar.

A quintessential cyclical stock

As the world's largest manufacturer of construction equipment, Caterpillar is a quintessential cyclical stock. That means Caterpillar's business performance is highly sensitive to the ups and downs of the economy. In times of economic expansion, Caterpillar's revenue and earnings flourish. During a contraction phase, they tend to fall off a cliff. That's why Caterpillar's long-term revenue trajectory looks more like a roller coaster than a staircase.

CAT Revenue (TTM) data by YCharts

Still, investors with the patience to weather the peaks and valleys have been richly rewarded. Since 1990, Caterpillar has delivered a dazzling total return of 13,000%, factoring in share-price growth, stock splits, and dividends.

In recent years, Caterpillar has been taking steps to smooth out the jagged edges in its cyclical sales streams. A key part of the strategy is growing its services business, which generates stickier recurring revenue.

In 2024, over two-thirds of Caterpillar's new equipment deliveries were sold with maintenance and equipment protection plans. Caterpillar is also seeing increased adoption of VisionLink, its subscription-based telematics app that provides real-time equipment data, service reminders, and diagnostics. Services revenue increased 4% to $24 billion, inching closer to the company's near-term goal of $28 billion by 2026.

Caterpillar is an AI play

When you think about Caterpillar, the first image that probably comes to mind is an excavator or wheel loader on a construction site, similar to the one pictured above. But Caterpillar's largest and fastest-growing business segment in 2024 was its energy and transportation (E&T) portfolio, which generated nearly $29 billion in revenue. Through the E&T portfolio, Caterpillar provides equipment and services for power generation, oil and gas, industrial, rail, and marine applications.

About a third of Caterpillar's E&T revenue comes from oil and gas customers. Caterpillar equipment is essential for the extraction and production of natural gas and oil. For example, its engines and turbines compress gas and move fuels along pipelines.

However, the biggest chunk of E&T revenue comes from distributed power generation, which refers to the production of electricity from non-grid energy sources near the point of use. Caterpillar's reciprocating (internal combustion) engines and turbines provide primary and backup power for data centers, utilities, factories, hospitals, and other facilities. The headliner, of course, is data centers.

The rise of artificial intelligence (AI) and cloud computing has sparked a data center boom. Goldman Sachs Research estimates that global electricity demand from data centers could grow as much as 165% by 2030, placing enormous strain on the power grid. That's a huge opportunity for Caterpillar. The company's power generation and energy storage solutions can help satisfy data centers' insatiable appetite for electricity until grid capacity catches up.

There's a lot to like about this Cat

One of the things I like about Caterpillar is that it cranks out boatloads of cash, even during down years. Despite a 3% decline in full-year 2024 revenue, Caterpillar generated $9.4 billion in free cash flow from its machinery, energy, and transportation segments, along with record adjusted profit per share of $21.90. Since 2019, the big cat has generated $40 billion in free cash flow -- and it knows exactly what to do with it.

Last year, Caterpillar returned $10.3 billion to shareholders, buying back $7.7 billion in CAT stock and doling out $2.6 billion in dividends. In June 2025, Caterpillar hiked its quarterly dividend by 7% to $1.51, marking the 31st consecutive year that the company has increased its annual payout. Meanwhile, the big cat has reduced its outstanding share count by 20% over the past decade. This is the kind of chart that investors love to see:

CAT Shares Outstanding data by YCharts

Caterpillar checks all the boxes as a blue chip stock. It's an industry leader with a reliable business model and a stellar reputation among customers and shareholders. It has a history of outperforming the broader market over the long term. And it has a shareholder-friendly capital allocation strategy, which helps take the sting out of cyclical downturns.

The shares currently trade at a forward price-to-earnings ratio of 23.4, which is comparable to the S&P 500 (23.3) and slightly lower than Deere & Co. (25.6). The share price has been under some pressure after Caterpillar disclosed in a recent SEC filing that it could take a $1.5 billion to $1.8 billion hit this year from President Donald Trump's tariffs. But I wouldn't let that deter you from adding this blue chip stock to your portfolio for steady long-term returns.

Should you invest $1,000 in Caterpillar right now?

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Josh Cable has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.