Fundamentally, CAT is actually looking better than DE, or at least at par.
Why did Buffet go with DE, instead the No. 1 spotted CAT? It is due to the management team.
Deere is led by CEO Sam Allen, a 37-year Deere veteran who was promoted to the role in 2009. Allen’s predecessor heavily emphasized metrics like total shareholder value added and operating return on assets. Continuing to emphasize an alignment between management and employee incentives, the top 1,000 most senior employees receive stock options, with the top 125 required to hold a minimum multiple of their salary as Deere stock or options. The company’s metrics-driven approach has been successful, demonstrated by the past decade’s 19% average ROIC. Deere’s first priority is maintaining its A credit rating, which is valuable to keeping its financial-services business competitive with non-captive financing outlets and ensuring liquidity over the duration of the business cycle. After ensuring balance sheet health, the company takes on capital deployment opportunities that exceed its 12% return on operating assets hurdle. After meeting these two priorities, the company pays a 25%-33% dividend payout ratio of mid-cycle earnings and deploys remaining cash flow via share repurchases. To a large degree, these repurchases have added value and reflect an internal opinion of Deere’s intrinsic value. Over the past decade, Deere has distributed 58% of its cash flow from operations to shareholders through dividends or buybacks.
For CAT, Doug Oberhelman joined Caterpillar in 1975 and was head of the engine division before becoming CEO in 2010. Brad Halverson, formerly the vice president of financial services, is now CFO. Many of Caterpillar’s senior leaders have spent many years at the firm and have been rotated throughout the business. Although Caterpillar’s senior and business line leaders have different operating responsibilities, they are all measured on how much value they generate above a 15% pretax return on tangible assets threshold. On a business unit level, managers are assessed on asset turn velocity, safety performance, product quality, and market share gains. The combination of these metrics has generated an attractive growth profile over the past decade and the company has done a good job navigating the current mining downturn and the 10% consolidated revenue decline that it generated.
Why did Buffet go with DE, instead the No. 1 spotted CAT? It is due to the management team.
Deere is led by CEO Sam Allen, a 37-year Deere veteran who was promoted to the role in 2009. Allen’s predecessor heavily emphasized metrics like total shareholder value added and operating return on assets. Continuing to emphasize an alignment between management and employee incentives, the top 1,000 most senior employees receive stock options, with the top 125 required to hold a minimum multiple of their salary as Deere stock or options. The company’s metrics-driven approach has been successful, demonstrated by the past decade’s 19% average ROIC. Deere’s first priority is maintaining its A credit rating, which is valuable to keeping its financial-services business competitive with non-captive financing outlets and ensuring liquidity over the duration of the business cycle. After ensuring balance sheet health, the company takes on capital deployment opportunities that exceed its 12% return on operating assets hurdle. After meeting these two priorities, the company pays a 25%-33% dividend payout ratio of mid-cycle earnings and deploys remaining cash flow via share repurchases. To a large degree, these repurchases have added value and reflect an internal opinion of Deere’s intrinsic value. Over the past decade, Deere has distributed 58% of its cash flow from operations to shareholders through dividends or buybacks.
For CAT, Doug Oberhelman joined Caterpillar in 1975 and was head of the engine division before becoming CEO in 2010. Brad Halverson, formerly the vice president of financial services, is now CFO. Many of Caterpillar’s senior leaders have spent many years at the firm and have been rotated throughout the business. Although Caterpillar’s senior and business line leaders have different operating responsibilities, they are all measured on how much value they generate above a 15% pretax return on tangible assets threshold. On a business unit level, managers are assessed on asset turn velocity, safety performance, product quality, and market share gains. The combination of these metrics has generated an attractive growth profile over the past decade and the company has done a good job navigating the current mining downturn and the 10% consolidated revenue decline that it generated.
