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 have 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 packaged goods giant Kraft (NYSE: KFT).

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 has gone toward dividends and buybacks.

 

2010

2009

2008

2007

2006

Buybacks

$0

$0

$777

$3,708

$1,254
Dividends

$2,175

$1,712

$1,663

$1,638

$1,562
Total Paid

$2,175

$1,712

$2,440

$5,346

$2,816

FCFE

$3,690

$3,765

$2,817

$1,806

$3,228

Source: Capital IQ as of July 29, 2011. Figures in millions.  
Free cash flow = net income depreciation-capital expenditures-change in noncash working capital.

Even though Kraft's total dividends paid has increased 39% over this period, the dividend-per-share figure has only increased by about 21%. That's largely due to the extra shares issued to former Cadbury shareholders, in order to help finance the massive acquisition in 2010. Indeed, the quarterly dividend has been held steady at $0.29 per share since September 2008.

This hasn't exactly been a great deal for long-term shareholders, who not only have a smaller slice of the pie, but receive the same amount of dividend income they did prior to the Cadbury deal.

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

59%

45%

59%

91%

48%

Source: Capital IQ, a division of Standard & Poor's.

Though the free cash flow cover of the dividend has been volatile, it looks like Kraft can afford its current payout. This volatility, however, may be contributing either to Kraft's unwillingness or inability to raise payouts.

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 Kraft an exception?

Source: Capital IQ, a division of Standard & Poor's.

Based on Kraft's five year buyback history, the record appears to be a bit shaky. It looks like Kraft bought back a lot of shares in the $30-$35 range in 2007 and 2008, which, in hindsight, wasn't terrible, but it wasn't buying back stock at all over the past three years when the share price was at times more attractively valued.

Competitors
How does Kraft'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

Kraft $645 $0 $2,029
PepsiCo (NYSE: PEP) $5,023 $2,416 $3,057
General Mills (NYSE: GIS) $851 $1,163 $729
Kellogg (NYSE: K) $837 $1,304 $584

Source: Capital IQ, a division of Standard & Poor's. All figures in millions as based on trailing-12-month data.

Foolish bottom line
Kraft may remain a Berkshire Hathaway (NYSE: BRK-B) holding, but it certainly has made a strange use of its free cash flow. Whether or not this was behind Warren Buffett's decision to sell a good chunk of Berkshire Hathaway's Kraft shares in 2010 and 2011 is unclear, but Buffett did say he "felt poorer" after the Cadbury acquisition was announced. I'm sure some shareholders can sympathize with that sentiment.