Investors like companies that return capital to shareholders through stock buybacks, but they're used to seeing companies make big repurchases when they're doing particularly well. That leaves heavy-equipment manufacturer Caterpillar (NYSE:CAT) as an unusual case, because the company didn't make buybacks during some of its stronger years but started them up even once the business started doing poorly. Even as revenue has sagged, Caterpillar has decided that its stock is a good bargain and has ramped up buyback activity over the past few years. Let's take a closer look at what Caterpillar has done with buybacks and how it will act in the future.
An inconsistent history of buybacks for Caterpillar
Caterpillar's history of buyback activity has been sporadic. In the run-up to the financial crisis, Caterpillar made repurchases of its shares. But from 2009 to 2012, the company didn't spend a penny on buybacks. That made sense for during 2009 and 2010, as many companies in the industry hadn't yet fully recovered from the difficulties in the industry.
But as prices of mined products like gold and other precious metals kept climbing into 2011, one could have expected Caterpillar to reinstate its buyback program. Elsewhere in the industry, Deere (NYSE:DE) took advantage of high farm prices to increase its buybacks dramatically from financial-crisis levels. Yet Caterpillar didn't follow Deere's example, choosing instead to increase its dividends as a way of returning capital to shareholders.
Buying shares at a bargain price
Instead, Caterpillar did what most investors would prefer companies do: It waited to implement buybacks when the stock was struggling. By 2013, Caterpillar had fallen back from its highs, as the construction, infrastructure, and mining industries had lost much of their economic strength. The energy industry was still going strong at that point, and Caterpillar saw the pullback as an opportunity to reduce its share count and improve its earnings per share.
By Jan. 2014, Caterpillar had completed a series of accelerated stock repurchase transactions to use up its 2007 authorization of $7.5 billion. The company then followed that completed buyback up with a new $10 billion authorization, which was set to run through the end of 2018. Further accelerated repurchases of $2.5 billion in July 2014 stepped up the pace of Caterpillar's return of capital to shareholders, and the company ended up spending another $2 billion on buybacks in 2015.
Can Caterpillar keep buying back stock?
Late last year, Caterpillar executives addressed whether the company would continue to buy back stock in 2016 and beyond. The equipment maker has several priorities for using its cash, and the company reiterated that its first priority is to keep its balance sheet as healthy as possible to ensure that it can survive through difficult industry conditions. The second priority is growth, and so if opportunities arise for the company to invest money in ways that can bolster internal prospects, then investors should be prepared for it to do so.
Beyond that, Caterpillar explicitly said that dividends are a key component of its capital allocation strategy, and the company also wants to make sure that it has funded its pension obligations sufficiently. Finally, Caterpillar said that buybacks come last, and the company chose not to provide a forecast of what it will do with repurchases in the future.
Investors need to understand Caterpillar's history of stock repurchases to put things like its current $10 billion authorization in context. It took the company years to use up its previous $7.5 billion, and it's unlikely that Caterpillar will be in a hurry this time around either. Investors should therefore look more at whether Caterpillar can recover and take advantage of future opportunities for growth rather than focusing on the prospect for stock repurchases in the near future.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool is short Deere & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.