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Caterpillar to Repurchase $1.7B Shares

Zacks Equity Research

Shares of Caterpillar Inc. (CAT) perked up 2.85% to close at $93.20 on Thursday as the company announced its intention to purchase approximately $1.7 billion of its common stock under an accelerated stock repurchase transaction. With this the company will complete its previous $7.5 billion repurchase authorization.

Caterpillar’s board of directors had authorized the repurchase of $7.5 billion worth of its common stock in Feb 2007. Until 2008, Caterpillar had expended $3.8 billion of the authorization and no shares of stock have been repurchased since then. In Dec 2011 this program was extended through Dec 2015. Following its first-quarter 2013 earnings, Caterpillar decided to resume the program, given its balance sheet strength and positive cash flow.

During fiscal 2013, Caterpillar repurchased $2 billion of shares. The current announcement does not come as a surprise as during the fourth-quarter conference call, the company stated its plans to repurchase approximately $1.7 billion of its common stock during the first quarter of 2014 and complete its existing $7.5 billion repurchase authorization. In addition, Caterpillar’s board of directors approved a new $10 billion stock repurchase program that will expire on Dec 31, 2018.

The share repurchases reflect a sound balance sheet. Caterpillar ended fiscal 2013 with cash and short-term investments of $6.1 billion, up from $5.5 billion as of fiscal 2012-end. Total debt-to-capital ratio improved to 64% as of Dec 31, 2013, from 70% as of Dec 31, 2012.

The debt-to-capital ratio at Machinery and Power System (M&PS) improved substantially to 29.7% as of Dec 31, 2013, compared with 37.4% as of Dec 31, 2012. This was the lowest debt-to-capital ratio in over 25 years.

Total cash flow from operating activities in 2013 almost doubled to $10.2 billion from $5.2 billion in the prior fiscal. Operating cash flow at M&PS was at a record $9 billion in 2013, up from $4.2 billion in 2012, thanks to the $2.9 billion of inventory reduction during the year.

Caterpillar also hiked its quarterly dividend by 15% to 60 cents per share in 2013, marking the highest percentage increase in dividend since the financial crisis of 2008. These repurchases and dividend hikes affirm its commitment to deliver superior returns to its shareholders.

This announcement comes on the heels of upbeat fourth-quarter results. On Jan 27, the mining and equipment behemoth reported a 5% increase in its fourth-quarter 2013 earnings to $1.54 per share -- the only quarter in fiscal 2013 to report a year-over-year growth. The company’s incessant efforts to cut down costs helped mitigate the effect of lower mining-related sales on its profits.

Caterpillar had been affected by slowing demand and inventory correction as a result of overproduction compared to demand. While these inventory reductions were a significant sales and production headwind for Caterpillar in 2013, their impact on the company’s sales is now largely over.

Thus, it seems the turbulent times for Caterpillar are likely over. The company expects its construction and power segment sales to deliver growth driven by a recovery in the US housing market, bottoming out the construction market in Europe and growth from China. The company will also reap the benefits of its cost reduction activities viz. shifting production between certain facilities, rationalization of its smaller facilities and workforce reductions.

Caterpillar’s cash flow has thus remained strong despite the drop in profits. Strong cash flow has enabled the company to improve its balance sheet, repurchase shares and raise its dividend and reduce its debt level. However, a declining backlog, and the persisting lower mining demand will continue to weigh on its results.

Peoria, IL-based Caterpillar Inc. is the manufacturer of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. The company is one of the few leading U.S. companies in an industry that competes globally from a principally domestic manufacturing base.

Caterpillar currently retains a Zacks Rank #3 (Hold). Some better-ranked stocks in the sector include Terex Corp. (TEX), Zebra Technologies Corp. (ZBRA) and Graco, Inc. (GGG). While Terex holds a Zacks Rank #1 (Strong Buy), Zebra Technologies and Graco hold a Zacks Rank #2 (Buy).

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