Why Caterpillar's 'High' Stock Price Shouldn't Alarm Investors

| About: Caterpillar Inc. (CAT)

Caterpillar (NYSE:CAT) is one of this bull market’s poster child stocks. Jim Cramer recently said that it’s the most exciting stock in the Dow Jones Industrial Average.

Fundamentally, the company seems to be doing all the right things in all the right places. Earnings growth has been excellent and the future looks even brighter (see “Caterpillar Provides Rosy Outlook” from Zacks Investment Research, March 24).

Caterpillar’s good fortunes have increased its stock’s popularity and price. Does this mean the stock is near its top? I believe there are three reasons (besides fundamentals) not to worry. Today's "high" price could look low tomorrow.

First, the stock is now in all-time-high territory

All-time-high stocks can sound risky, but there is good news for those who make it there. It takes real improvement to drive a stock into uncharted territory. The company is simply better than it’s ever been. The previous ceiling barriers are gone.

Caterpillar itself has furnished examples of all-time-high price moves in the past.

click to enlarge images

Caterpillar - All-time-high prices

Second, the stock is significantly outperforming the market

Riding a market uptrend is one thing. Exceeding the market consistently shows real leadership. Caterpillar has exhibited dramatic leadership since the stock market turned up in 2009.

Caterpillar - Relative strength

Third, two announcements benefiting shareholders could come soon (June?)

  1. First, Caterpillar will likely announce a dividend increase, starting with the August payment (this is their usual timing). Because earnings (both actual and forecast) have grown significantly, the dividend increase could well exceed last year’s 4.8%.
  2. Second, a 2:1 stock split could occur at the same time. Caterpillar historically has split when the price has gotten well above $50. The past three splits have been 2:1 when the stock climbed to $100 – and here we are again.

Caterpillar - Splits

A word about stock splits

In normal bull markets, splits carry little weight, being seen as simple division rather than fundamental change. However, we are in a unique time. For over two years, stock splits have been rare. Therefore, the first major stock to announce one should be noteworthy.

Moreover, because company executives and boards view splits as long-term actions (i.e., “this price increase is real, and we expect it to continue”), investors might gain optimism. Therefore, a Caterpillar stock split could generate increased investor interest (and buying).

Caterpillar is a leader in this bull market. The stock's new high price looks deserved, not the result of over-optimism. CAT looks likely to continue being a winning investment for some time to come.

Disclosure: I am long CAT.