As announced today, Deere's (NYSE:DE) Board of Directors authorized the repurchase of up to $8 billion of additional common stock. The company states that on October 31, 2013, there was approximately $1 billion remaining under the prior authorization, which means that the total authorized amount for repurchases reaches $9 billion. This is more than the total amount spent on buybacks in the 8 year period from 2004 to 2012.
Deere will proceed as always opportunistically, i.e. repurchases will be made at the company's discretion in the open market and only if the company believes its shares are undervalued. During the Q3/2013 conference call on August 14, 2013, when the stock hovered around prices not very different from today's, Marie Ziegler (Deputy Financial Officer) stated, that "as our stock has continued to provide us with a very good buying opportunity - we think we're significantly below our intrinsic value - we were able to step up the share repurchase." (Which by the way is a statement value investors must cheer at.)
The company has repurchased about $11 billion of common stock through its share buyback program since 2004, hence the current amount of further $9 billion more than justifies today's sharp jump of the share price, as $9 billion represent almost one third of Deere's current market capitalization.
However, considering the above mentioned buyback policy of the company, investors should not expect the share count to shrink rapidly. It may do so, but might also not, as the pace of repurchases will totally depend on the opportunities Mr. Market will offer. The last $5 billion buyback authorization was issued in 2008 and today there is still $1 billion left.
If Deere continues to repurchase its stock at roughly the same pace as in the past 5 years, investors can be satisfied anyway: shares outstanding were reduced from 436 million to 375 million or at a rate of 3% per year. With almost twice the amount authorized, we can expect that shares outstanding will be reduced at an even faster pace.
All in all, today's news more than confirms my revenue and margin expectations laid out in my last article on Deere & Co., where I had factored in only a 2% reduction of shares outstanding per year. With a 4% reduction per year, shares outstanding could shrink even down to about 310 million in 2018 and I would now expect Deere's EPS to reach about $15 in the same year. This means that we need only a PER of 11 to double our money in 5 years (including dividends). Add the company's robust balance sheet and shareholder friendly management and it's easy to see why Deere today can be considered one of the best bargains around for conservative investors.