We recently compiled a list of the 10 Best GARP Stocks That Pay Dividends. In this article, we are going to take a look at where Caterpillar Inc. (NYSE:CAT) stands against the other GARP stocks that pay dividends.
Over the past year, the market has highlighted the importance of diversifying portfolios to manage risk. Selecting stocks that perform well under various economic conditions has consistently been a challenge for investors, as strategies that work in one market may not work in another. For instance, growth and value stocks have shown different performance trends in various market conditions, making both approaches appealing to investors. Combining elements of both strategies can provide a refreshing alternative to traditional investment plans. This is where the GARP strategy comes into play. Growth at a Reasonable Price (GARP) is an investment strategy that focuses on finding companies with strong, sustainable earnings growth and appealing valuations in relation to their growth potential. These companies are often in sectors with positive growth trends or have competitive advantages that position them for future success.
The GARP strategy, popularized by Peter Lynch, aims to strike a balance between growth and value investing by avoiding the extremes of either approach. It focuses on finding growth stocks that have relatively low price-to-earnings ratios under typical market conditions. When these stocks are identified successfully, they can offer strong returns for investors. Historically, the GARP Index has outperformed its benchmark by tracking companies that demonstrate consistent fundamental growth, reasonable valuations, and strong earnings potential.
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The strategy has gained popularity not just in the US, but also globally. After Global X launched the first global broad-based index exchange-traded fund (ETF) in Australia using the GARP framework in September 2024, the strategy delivered strong early-stage performance. According to a Global X report, while global equity markets experienced a rally towards the end of 2024, the GARP stocks outperformed the broader market and other factors like quality, rising approximately 20% since the ETF’s launch. The report also noted that GARP’s success wasn’t driven by technology, but rather by broader sectors such as consumer goods, financials, and communication.
Analysts globally are also advocating for the GARP strategy. For instance, Brian Belski, chief strategist at BMO Capital, recommended that Canadian investors adopt the GARP approach this year. Here are some comments from the analyst:
“Growth at a Reasonable Price (GARP) remains one of our key style preferences for Canadian equities. Furthermore, earnings growth and revision trends are broadly consistent with the market, suggesting there are likely many opportunities developing in Canada to implement a growth at a reasonable price strategy.”
In the US, a report from S&P Dow Jones Indices revealed that the GARP Index delivered an average annual return of 13.2% from June 1995 to June 2019, outperforming the broader market’s 9.81% growth. Over the same period, the market’s Growth Index and the Enhanced Value Index returned 10.41% and 11.83%, respectively. The report also highlighted that the GARP Index achieved better risk-adjusted returns compared to both the growth and value indices during this time frame.
A CNBC report also highlighted insights from BMO’s analysts regarding investment strategies to navigate market uncertainties in the U.S. According to the report, investors should consider the GARP approach alongside dividend growth strategies in the current financial landscape. Dividend stocks have historically performed well during inflationary periods, making them a favored choice among investors. Given this, we will take a look at some of the best GARP stocks that pay dividends.
Our Methodology
GARP stocks have reasonable valuations and strong growth potential, which means that their P/E ratios are not necessarily as low as value stocks. For this article, we used the GARP Index (SPXGARPP) and identified dividend stocks from the list. From that group, we picked 10 dividend companies with the highest number of hedge fund investors, according to Insider Monkey’s database of Q3 2024. These stocks were ranked based on the number of hedge funds having stakes in them.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A construction crew operating a hydraulic shovel during a nighttime project.
Caterpillar Inc. (NYSE:CAT)
Number of Hedge Fund Holders: 50
An American manufacturing company, Caterpillar Inc. (NYSE:CAT) specializes in construction, mining, and other engineering equipment. Analysts have an optimistic outlook for the company, given that the global market for backup power solutions in AI data centers could reach nearly $23 billion by 2028. In a research note from December, Jefferies highlighted several key factors supporting Caterpillar’s growth prospects. The firm pointed to a potential increase in demand for construction equipment, particularly for rebuilding efforts in war-affected regions like Ukraine. In addition, expectations of eased oil production regulations in the US could drive higher demand for construction machinery within the domestic oil and gas sector. At the same time, Jefferies anticipates a rise in demand for mining equipment due to the growing need for minerals essential to renewable energy production.
In the past 12 months, Caterpillar Inc. (NYSE:CAT) has delivered over 11.5% return to shareholders. In the fourth quarter of 2024, the company posted revenue of $16.2 billion, reflecting a 5% decline from the same period a year earlier. The decrease was largely driven by an $859 million drop in sales volume, mainly due to shifts in dealer inventories and lower equipment sales to end users. Dealer inventory levels decreased by $1.3 billion during the quarter, a steeper decline compared to the $900 million reduction in the fourth quarter of 2023. Meanwhile, the company’s profit per share rose to $5.78, up from $5.28 in the same period last year.
Caterpillar Inc. (NYSE:CAT) maintained a solid financial position in 2024. The company generated $12.0 billion in operating cash flow throughout the year and ended the fourth quarter with $6.9 billion in cash. Over the year, it allocated $7.7 billion toward share repurchases and distributed $2.6 billion in dividends to shareholders. The company’s quarterly dividend comes in at $1.41 per share for a dividend yield of 1.6%, as of February 14. It is one of the best GARP dividend stocks on our list as the company has raised its payouts for 30 years straight.
Overall CAT ranks 8th on our list of the best GARP stocks that pay dividends. While we acknowledge the potential for CAT as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than CAT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.