Before you read on, though, get up to speed on the head-to-head matches between Ford (NYSE:F), Harley Davidson (NYSE:HOG), The Men's Wearhouse (NYSE:MW) and Dick's Sporting Goods (NYSE:DKS) here and here.
Ding, ding, ding. Let the fight begin!
~ Round 1: Steady Demand
The fact that Deere and Caterpillar have been in business for 175 years and 87 years, respectively, underscores the steady demand for their products. They're vital to everyday industry. That said, both businesses are highly cyclical.
Deere's fortunes rely heavily on the fortunes of farmers. High crop yields and prices lead to higher incomes, which can be spent on new equipment. But unfavorable weather, low yields and low prices can lead to the opposite.
Meanwhile, Caterpillar's business is tied to the commodity markets, as higher prices encourage more infrastructure construction in the mining and energy sectors.
Headed into 2013, we're thankfully on the right side of both cycles. But that doesn't mean both companies are equally attractive.
I'm giving this round to Caterpillar, because almost 50% of its sales now come from more stable service-based revenue, according to Morningstar. And Deere can't boast the same.
~ Round 2: Cash Flow Positive
Cash is king, particularly when it comes to evaluating the safety of a company's dividend. After all, if there's no cash flowing in, there's no way the company can keep sending it out.
Caterpillar typically generates billions of dollars in free cash flow (NYSE:FCF). Over the last 12 months, though, its FCF actually dipped into negative territory. The cause? Significant capital expenditures. Same goes for Deere.
But the reversals signal an investment in future growth, which is a positive development, not an indicator of deterioration in either company's underlying business. It's not a condition I expect to continue. And I'm willing to overlook it because of what you're about to learn…
~ Round 3: High Cash Balance
While cash flow might temporarily be negative, Caterpillar has $3.4 billion in the bank. That's enough to cover about two-and-a-half years' worth of dividends.
But Deere's sitting even prettier with $5 billion in cash, which is enough to cover its dividend payments for seven years.
~ Round 4: Minimal Need for Credit
Since manufacturing businesses are capital intensive, it's no surprise that both companies aren't debt free.
At first glance, Caterpillar and Deere appear almost equally indebted, with total debt of $39.9 billion and $32.4 billion, respectively. Upon closer examination, though, Deere is actually more reliant on leverage, making it riskier. Its debt-to-equity (D/E) ratio checks-in at 3.28, compared to Caterpillar's D/E ratio of 1.48.
~ Round 5: Earnings Buffer
We already know that multi-billion dollar cash balances buttress Deere's and Caterpillar's dividends. They're also well supported by earnings.
Deere's dividend payout ratio (DPR) checks-in at 23.5, leaving ample room to pay (and increase) dividends in the future. Caterpillar is in even better shape with a DPR of 19.5 over the last 12 months.
~ Round 6: Dividend Yield and Growth
You'll recall in the last manly dividend stock matchup, Ford and Harley Davidson sported scrawny yields of 1.8% and 1.3%, respectively.
Thankfully, today's two contenders don't suffer from the same deficiency. At current prices, Caterpillar yields 2.3% and Deere yields 2.1%, which are in-line with the average stock in the S&P 500 Index.
Of course, dividend yield isn't the only thing that matters. Dividend growth is actually more important. And over the last five years, both companies have rewarded shareholders with double-digit increases in dividend payments. However, Caterpillar boasts a longer track record of upping its payout - 19 years versus 10 for Deere.
~ Round 7: Valuation
At current prices, Deere trades at a price-to-earnings (P/E) ratio of 11.3, which represents a sizeable discount to the S&P 500 Index (15.1) and the company's five-year average P/E ratio (17.7).
But Caterpillar is even cheaper. At current prices, it trades at a P/E ratio of 9.3, which is below the industry (10.1), the S&P 500 and the company's five-year average P/E ratio (19.2).
Let's go to the scorecard…
After seven rounds, Caterpillar tops Deere by a margin of five to one (one round ended in a draw), thanks to its cheaper valuation, focus on stable service-based revenue and a longer history of dividend increases.