Many companies talk about how they enhance shareholder value by returning cash through dividends or stock buybacks. But investors shouldn't just take the company's word for it.
In this series, we'll investigate how companies spent free cash flow over the past five years. By doing so, we hope to gain insight into whether the company's management might be good stewards of shareholder capital.
Today, we'll take a look at consumer goods giant Procter & Gamble
How does it spend free cash?
First, let's have a look at how much free cash flow the company has generated in each of the past five years and how much of that has gone to dividends and buybacks.
|
Metric |
2010 |
2009 |
2008 |
2007 |
2006 |
|---|---|---|---|---|---|
| Buybacks | $8,118 | $2,541 | $9,809 | $8,346 | $10,551 |
| Dividends | $5,239 | $4,852 | $4,479 | $4,048 | $3,555 |
| Total Paid | $13,357 | $7,393 | $14,288 | $12,394 | $14,066 |
| Free Cash Flow | $10,351 | $15,953 | $12,345 | $8,798 | $10,046 |
Source: Capital IQ as of July 20, 2011.
Figures in millions.
Free cash flow = net income depreciation-capital expenditures-change in noncash working capital.
Procter & Gamble has one of the more enviable dividend track records in the S&P 500. It's been paying dividends for the past 121 years and raising its payout for 55 consecutive years.
Cumulatively over this period, however, P&G bought back more than $39 billion of its shares, while paying out $22 billion in dividends. Despite the long dividend track record, it seems P&G loves buying back its own shares more than paying out dividends.
Is the dividend covered?
Next, let's see how much of the company's free cash flow has gone to dividends.
|
Metric |
2010 |
2009 |
2008 |
2007 |
2006 |
|---|---|---|---|---|---|
| FCF Payout Ratio | 51% | 30% | 36% | 46% | 35% |
Source: Capital IQ, a division of Standard & Poor's.
Procter & Gamble's free cash flow payout ratio has been somewhat volatile over this five-year period, paying out between 30% and 51% of free cash flow each year as dividends. Still, P&G covers each $1 paid out in dividends (3.3% yield) with nearly $2 of free cash flow, which is quite good.
Is it a good investor?
Companies are notoriously bad investors in their own stock. Consider that in 2007, when the market was hitting record highs, S&P 500 companies bought back a record $589 billion, versus $246 billion in cash dividends. In 2009, when the market was around its nadir, buybacks hit record lows.
Is P&G an exception?
Source: Capital IQ, a division of Standard & Poor's.
Judging by this chart, it's hard to tell whether or not P&G is particularly skillful at timing share buybacks. That's largely because, with the exception of the financial crisis, its share price has hovered between $60 and $75 over the last five years.
In the latest quarter, P&G repurchased $1 billion worth of shares. According to Capital IQ, P&G's five-year average price-to-earnings ratio is 18.7, while its current trailing P/E is 17, so it may indeed be a reasonable time for the company to buy back shares.
Competitors
How does Procter & Gamble's use of free cash flow stack up against some of its major competitors over the past four quarters?
|
Company |
Free Cash Flow |
Share Buybacks |
Dividends |
|---|---|---|---|
| Procter & Gamble | $9,145 | $7,123 | $5,239 |
|
Church & Dwight |
$301 | $0.1 | $58 |
|
Colgate-Palmolive |
$2,223 | $2,095 | $1,070 |
|
Kimberly Clark |
$1,233 | $1,474 | $1,085 |
Source: Capital IQ, a division of Standard & Poor's.
All figures in millions as based on trailing-12-month data.
Foolish bottom line
Procter & Gamble has consistently generated free cash flow. Since 2006, it has returned an astounding $61 billion to shareholders via buybacks and dividends. As a P&G shareholder myself, however, I would prefer to see a more even split between free cash flow spent on buybacks and dividends.
