Cummins Inc. has announced that it will repurchase $500 million of the company’s common stock as part of a previously announced plan to return 75 percent of operating cash flow to shareholders this year.
The Columbus-based global power company said it has entered into an accelerated share repurchase agreement with Goldman, Sachs & Co. LLC. Under terms of the agreement, Cummins will repurchase the stock from Goldman, Sachs & Co., with an initial delivery of about 3 million shares based on current market prices.
The final number of shares to be repurchased will be based on Cummins’ volume-weighted average stock price during the term of the transaction, less a discount, the company said.
Chairman and CEO Tom Linebarger said July 31 during the company’s second-quarter earnings release — which reflected record quarterly sales and profits — that Cummins would increase operating cash flow to shareholders, in the form of dividends and share repurchases, from 50 to 75 percent this year.
The company, which makes diesel and natural gas engines, fuel systems, emissions solutions and electrical power generation systems, among other products, has no imminent needs for the cash, such as an acquisition, so it wants to return the money to shareholders, Linebarger said then. Cummins stock is undervalued and a good investment, he said.
“As in any marketplace, stock prices are determined by supply and demand. By repurchasing shares, a company increases the demand for its stock while simultaneously reducing supply in the marketplace,” said Roger Lee, senior research analyst with Columbus-based Kirr, Marbach & Co.
Cummins stock reached a company-record closing price of $192.50 on Jan. 26, but dropped to $131.05 by July 3. The high cost to fix an aftertreatment component problem on some of its engines is a contributing factor, analysts have said. However, the stock has since rebounded to the $140s.
The stock buyback by Cummins sends a message that the company is doing well because warranty costs and EPA issues are behind them, said Scott DeDomenic, senior vice president and analyst with Hilliard Lyons’ office in Columbus.
