Caterpillar Inc. (NYSE:CAT) has the potential to generate around $15-$17 billion of cumulative free cash through 2016, and could even repurchase up to 35 million shares per year over the next three years, says a report from Barclays on 31 March 2014 by analysts Andy Kaplowitz, Vlad Bystricky, Alan Fleming and Jing Feng. If the company is able to achieve the repurchase targets, then the reduced share count could add up to $1.20 of EPS by the end of 2016, believe analysts.

caterpillar

Two scenarios for Caterpillar 

In the high growth scenario, analysts expect Caterpillar Inc. (NYSE:CAT) to generate up to $17 billion in free cash in the next three years, or around $5.6 billion each year. After distributing dividends and “some modest assumed bolt-on M&A,” the equipment maker will be left with $11 billion in free cash to buy back shares. With such cash, the company could repurchase up to 37 million shares per year, including the previously announced plan of repurchasing 18 million shares in the first quarter of 2014.

In the low growth scenario, Caterpillar Inc. (NYSE:CAT) is expected to generate up to $15 billion of free cash over the next three years. After distributing dividends and “a slightly higher assumption for M&A,” the company will have $5.6 billion of cash to carry out share repurchases. With the available cash, analysts believe, the company could buyback around 23 million shares per year for the next three years.

Assumptions made by the analysts

For both scenarios, analysts have to assume the average share repurchase price, which is difficult task to do. Analysts have assumed a lower share price considering the slower growth environment. Also, both the scenarios are based on the improvement in Caterpillar Inc. (NYSE:CAT)’s core non-mining related end markets.

According to analysts, there is also the possibility that the management of the company “could pull back on” repurchases owing to a higher share price.

While there is no surety on what Caterpillar Inc. (NYSE:CAT) will do with the excess cash over the next three years, analysts feel that returning it to the shareholders would be a more reasonable move considering the potential of the company. Presently, the balance sheet of the company is fairly strong as many times, previously, management has noted that Machinery and Power Systems ended 2013 with the lowest debt-to-capital ratio in 25 years.

Barclay’s analysts have maintained Overweight rating on Caterpillar Inc. (NYSE:CAT), and raised the price target from $107 to $112.