Caterpillar (NYSE: CAT) Now Makes Up 11% of the Dow. Could a Stock Split Come Before Year-End?

Caterpillar (NYSE: CAT) is up 265% in the last three years, largely thanks to the artificial intelligence (AI) boom. Its earth-moving equipment is being used for AI data center construction. Caterpillar also has a massive mining business that is benefiting from resource demand.

Perhaps most importantly, Caterpillar's Power & Energy segment is perfectly positioned to capitalize on surging power generation demand as AI data centers look to go behind the meter by producing their own electricity and avoid lengthy interconnection delays associated with grid power. With the AI energy bottleneck intensifying and hyperscalers continuing to pour record capital expenditures into AI, demand for Caterpillar's products should continue to outpace supply for the foreseeable future.

Now, with Caterpillar's stock price knocking on the door of $1,000 per share, some investors may be wondering if the industrial giant could issue a stock split -- especially with Caterpillar now making up a staggering 10.6% of the Dow Jones Industrial Average.

Here's why a stock split could be on deck, and the biggest obstacle standing in its way.

Image source: Getty Images.

There's an even better stock split candidate than Caterpillar

Because of its price-weighted nature, stock splits have a major impact on the Dow. Amazon and Alphabet issued stock splits in 2022, which brought their stock prices closer to the median of the Dow and paved the way for their entry into the index. Similarly, stocks that run up in price and don't split can quickly tilt the index out of balance.

Caterpillar's surging stock price has propelled it to the second-highest-weighted company in the Dow behind Goldman Sachs. Combined, both stocks make up 23.5% of the Dow. In contrast, the two largest stocks in the S&P 500 make up 14.4% of the index.

But even with Caterpillar's massive weighting, the industrial sector only makes up 17.3% of the index compared to 28.6% for financials. So, despite what the name implies, the Dow isn't the industrially focused index it used to be.

Therefore, there's a much stronger case for Goldman Sachs to issue a stock split and reduce its individual and sector weightings. What's more, Meta Platforms has a compelling case for inclusion in the Dow, given its consistently high free cash flow, industry-leading position, and recently implemented dividend. Goldman Sachs splitting its stock would provide the catalyst needed to add Meta to the index, most likely replacing Nike.

The Dow can rebalance naturally

The Dow has gone through many periods when stocks temporarily accounted for a large share of the index, only for market cycles to even out the weights over time.

In 2019, Boeing made up over 11% of the Dow, driven by a rapid price surge. But the COVID-19 pandemic, along with other issues, has made Boeing a major laggard since. And without even issuing a stock split, Boeing's underperformance, paired with outperformance by other components and index shake-ups, has pushed Boeing down to just 2.5% of the Dow.

That's not to say that Caterpillar is destined for the same fate, but it is a cyclical company. So it wouldn't be surprising if Caterpillar waited to see how the AI infrastructure market evolves instead of rushing to issue a split.

Daniel Foelber has positions in Nike. The Motley Fool has positions in and recommends Alphabet, Amazon, Boeing, Caterpillar, Goldman Sachs Group, Meta Platforms, and Nike. The Motley Fool has a disclosure policy.