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Caterpillar to Repurchase $2.5B Worth of Common Stock

Zacks Equity Research

Shares of Caterpillar Inc. ( CAT) edged up 0.52% to close at $104.69 yesterday as the company announced the purchase of approximately $2.5 billion of its common stock under an accelerated stock repurchase transaction. 


Caterpillar entered into an agreement with Societe Generale Group ( SCGLY) to purchase the shares. Per the agreement, Caterpillar will immediately deliver approximately 22 million shares based on current market prices.


The final number of shares to be repurchased and the aggregate cost per share to Caterpillar will be based on Caterpillar's volume-weighted average stock price during the term of the transactions. Caterpillar expects to complete the balance of the repurchase agreement in September.


Earlier, in Jan 2014, Caterpillar had announced a similar $1.7 billion transaction, to complete its previous $7.5 billion repurchase authorization. During fiscal 2013, Caterpillar repurchased $2 billion of shares and raised the dividend by 15%. In June of 2014, the company increased the dividend by an additional 17%. In the first quarter, Caterpillar’s board of directors had approved a new $10 billion stock repurchase program that will expire on Dec 31, 2018.


In the first half of fiscal 2014, Caterpillar returned $2.5 billion to shareholders through dividend payments of $0.7 billion and share repurchases of $1.7 billion. The current announcement does not come as a surprise as during the second-quarter conference call, the company stated its plans to repurchase approximately $2.5 billion of its common stock during the third quarter of 2014. With this repurchase, Caterpillar’s total stock repurchases will be $4.2 billion in the current fiscal.


The share repurchases reflect a sound balance sheet. Caterpillar ended the second quarter of 2014 with cash and short-term investments of $7.9 billion, up from $6.1 billion at 2013 end. Total debt-to-capital ratio was at 66% as of Jun 30, 2014 compared with 64% as of Dec 31, 2013.


The debt-to-capital ratio at ME&T was 32.5% as of Jun 30, 2014 compared with 29.7% as of Dec 31, 2013. Total cash flow from operating activities in the first half of fiscal 2014 was $4.1 billion compared with $4.6 billion in the prior-year comparable period. Operating cash flow at ME&T was $2.06 billion in the reported quarter, down from $3.05 billion in the prior-year quarter.


This announcement come on the heels of Caterpillar’s mixed second-quarter results. On Jul 24, the mining and equipment behemoth reported a 17% increase to $1.69 per share in its second-quarter earnings, trumping the Zacks Consensus Estimate of $1.51. The company’s incessant efforts to cut down costs and continued deployment of operational improvement in the Construction segment along with record profit from Energy & Transportation helped mitigate the effect of lower mining-related sales on its profits. 


Caterpillar has initiated extensive cost-saving programs across its global businesses and will continue to benefit from additional restructuring actions in 2014 to optimize its cost structure and improve its operational efficiency. Strong cash flow has enabled the company to improve its balance sheet, repurchase shares and raise its dividend as well as reduce its debt level.


Caterpillar will also benefit from the ongoing recovery in the U.S. construction sector as well as from share repurchases. However, a muted mining capex continues to bother this mining equipment giant.


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 carries a Zacks Rank #2 (Buy). Some other stocks worth considering in the sector include Komatsu Ltd. ( KMTUY), H&E Equipment Services Inc. ( HEES). While Komatsu sports a Zacks Rank #1 (Strong Buy), H&E Equipment Services holds the same rank as Caterpillar.

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