Why Has Caterpillar Stock Soared 184% in the Last 12 Months?

It's always surprising when a long-standing stock in a traditional industry soars in price. Several years ago, few investors or analysts would have expected that heavy machinery and vehicle specialist Caterpillar (NYSE: CAT) would be such a title. Yet over the past year, the company's shares have nearly tripled in price, rising far more steeply than the S&P 500 index's 25%.

Talk about a sleeper stock! Let's spend a few moments discussing what's made "the Cat" so popular with the market.

AI advancement

The main secret to Caterpillar's recent success can be summarized in two words: artificial intelligence (AI). Despite its rather dowdy public reputation (among those who know the company at all), Caterpillar is at the forefront of the revolution, bringing today's heavily in-demand technology to our computer screens and mobile devices.

Image source: Getty Images.

This is because one of Caterpillar's main business units is its power and energy division. Within this, its reciprocating engines and the generator sets (gensets) that accompany them are go-to solutions for advanced data centers housing AI infrastructure.

AI is resource-heavy, and one of those resources is power. Not only does a facility stuffed with AI hardware require great amounts of this, but it also has to be supplied constantly and without interruption. Caterpillar's power solutions were originally designed as backup options, but their high reliability and strong reputation have made them primary choices for many clients.

Caterpillar can make quite a bundle on such provisioning. It tends to sell the engines and the gensets as packages, complete with comprehensive service agreements that cover items such as diagnostics and maintenance.

AI data centers are crucial to the technology, so the entities that run them have a vested interest in securing such services for long terms. So the service agreements typically provide years of the predictable revenue that so many buy-and-hold investors love.

It's hardly unusual for Caterpillar to be in the news when a massive AI data center project is announced. Just days ago, Microsoft and oil giant Chevron signed a deal to partner in a huge facility in Texas; no prizes for guessing which company, along with fellow industrial GE Vernova, will provide the power infrastructure for it.

Shareholder payout's a plus

A growing company that pays a regular dividend offers extra incentive to own its shares. Let's give Caterpillar a big check mark for this, as it has paid a quarterly dividend for over 90 years. What's more, it's declared dividend raises for 32 years in a row, with its most recent increase by 8% bringing the payout to $1.63 per share.

Although the skyrocketing price of Caterpillar's shares has reduced the dividend's yield (to only 0.6%), the company's durability and reliability are rare qualities in the businesses participating in the great AI build-out.

Meanwhile, management recently increased its guidance significantly for the power and energy segment. It now believes that between 2024 and 2030, its sales will triple. Previously, it was counting on the unit "only" doubling its take across that stretch.

So even though Caterpillar's stock price has soared, I think it's yet to peak. The coming years should see it continue to post impressive growth numbers, underpinned by that busy power and energy business. I'd expect this storied industrial to reach even loftier highs before long.

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Caterpillar, Chevron, GE Vernova, and Microsoft. The Motley Fool has a disclosure policy.