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Summary

  • Caterpillar said that it will immediately buy back $2.5 billion of its common stock under an accelerated stock repurchase program.
  • This confirms our original investment thesis that Caterpillar's restructuring initiatives have started to bear fruit.
  • Although we didn't anticipate that an accelerated stock repurchase program is in the cards, we remained optimistic about Caterpillar's effort to reorganize business.

Caterpillar (NYSE:CAT) announced last week that it has entered into a definitive agreement with Société Générale (OTCPK:SCGLY) for buying back a total of $2.5 billion of its common stock under an accelerated stock repurchase program. The company has agreed to repurchase approximately 22 million shares with an immediate delivery based on the current market price. Caterpillar said that the final number of shares to be repurchased and the aggregate cost per share will be based on Caterpillar's volume-weighted average stock price during the term of the transactions, which would be completed in September.

The quick share buyback program reflects a sound balance sheet. Caterpillar Chairman and CEO, Doug Oberhelman said, "Repurchasing an additional $2.5 billion of Caterpillar stock in the third quarter of 2014 will bring our total 2014 stock repurchases to $4.2 billion. This, combined with the 17 percent increase in our quarterly dividend announced in June, clearly shows how we are taking advantage of our strong cash position to deliver superior returns to stockholders."

In our original article, we said that Caterpillar could be an excellent bet on its restructuring initiatives. We observed that the company's cost-cutting initiatives led to significant improvement in its bottom line in the first quarter. On July 24, Caterpillar reported that in the second quarter, its earnings per share reached $1.69 excluding restructuring costs, a 17% year-over-year increase. Strong cash flow has allowed the company to strengthen its balance sheet, repurchase shares and raise dividend. We believe that Caterpillar's extensive cost-cutting programs across its global businesses will further optimize its cost structure and boost operational efficiency. To learn more, read our original article.

Business relationship disclosure: The update has been written by a BB Research stock analyst. BB Research is not receiving compensation for it (other than from Seeking Alpha). BB Research has no business relationship with any company whose stock is mentioned in this article.

Source: Update: Caterpillar Will Immediately Buy Back Shares Worth $2.5 Billion