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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: - with a K who wrote (26026)	2/17/2007 10:35:12 AM
From: - with a K	Read Replies (2) \| Respond to of 78717

More on CAT buyback: We all know the story of companies who announce a buyback but never fall through with all of it. Note the language in this story. Business is strong at CAT and they are confident about the future. Feb 16, 2007 (Chicago Tribune - McClatchy-Tribune Business News via COMTEX) -- Caterpillar Inc. said Thursday that directors approved a plan to spend as much as $7.5 billion buying back the company's stock and predicted the repurchase will be completed "within the next five years." If exercised in full at current prices, the buyback would take 17 percent of the Peoria-based company's shares out of circulation. The heavy-equipment manufacturing giant noted the new authorization will replace an existing $6.4 billion buyback approved in October 2003, which is expected to be exhausted within months. By reducing the number of shares outstanding, stock buybacks automatically raise the value of the remaining shares and are usually popular with investors. In New York Stock Exchange trading Thursday, Caterpillar's disclosure helped the company's stock rise $1.46, or 2.2 percent, to close at $67.62. The stock market's muted response reflects the reality that Caterpillar's repurchase program will be spread out over years, during which millions of new shares will be created as employees exercise stock options they've been granted. As with most repurchase plans, a good portion of the Caterpillar buyback will be spent sopping up new shares that would otherwise dilute the value of existing shares. With the earlier buyback authorization nearly used up, analysts had been anticipating announcement of a new repurchase program from Caterpillar, but it was larger than expected. Merrill Lynch analyst Andrew Obin told investors that he had been expecting a $5.5 billion buyback. However, he said, "we calculate that the higher-than-expected buyback has a limited impact on our earnings projections." Wall Street values shares by applying a multiple to a company's per-share earnings. Thus, if a company has per-share earnings of $1 a year, and Wall Street values companies in its industry by a multiple of 8, the company's shares should trade very close to $8 apiece. Buybacks, by reducing the shares outstanding, boost per-share earnings. But Obin said his Caterpillar earnings estimates for 2007 and 2008 of $5.60 a share and $6.05 a share, respectively, were already based on the expectation that Caterpillar would spend $2.1 billion buying back its shares in 2007 and $1.4 billion in 2008. The larger buyback, he said, could add 2 percent or 3 percent to his estimates, "which ultimately has a limited impact on Caterpillar's valuation." When corporations buy back their shares, they are spending money that otherwise might be spent on new factories, product development or other growth initiatives. However, Caterpillar isn't stinting on such outlays. The company, which has recorded record profits for three consecutive years, is simply generating a staggering amount of cash as it sells in a very strong global market. "As has been customary for Caterpillar," the company emphasized Thursday, "cash is used primarily to fund growth through capital expenditures and strategic acquisitions, maintain well-funded pension plans and consistently increase dividends, with remaining cash returned to stockholders through repurchase programs." CEO praises prospects Chairman and Chief Executive Jim Owens called completion of the company's previous buyback program more than 18 months ahead of schedule "a testament to our strong cash flows and financial position." He said the new authorization is evidence of "our confidence in the long-term growth prospects of our company and in our ability to continue to generate strong cash flows to grow our business and to enhance stockholder value." Share repurchases are frequently more popular with stockholders than dividend payouts, which generate immediate tax consequences for all holders. In contrast, reducing the number of shares outstanding lets companies boost the value of their remaining shares with no immediate tax issues for their stockholders. Caterpillar's new buyback program comes on the heels of mega-buyback announcements from some other companies. Earlier this week, 3M Co., a huge diversified manufacturer that turned in a less-than-overwhelming performance in 2006, disclosed that its directors had approved a $7 billion, two-year repurchase authorization that could take in just under 13 percent of the company's outstanding shares. Similarly, railroad operator CSX Corp. announced a $2 billion, two-year buyback authorization that, if fully exercised, could reduce current shares outstanding by 11 percent.