What Archer Daniels Midland Does With Its Cash

In the quest to find great investments, most investors focus on earnings to gauge a company's financial strength. This is a good start, but earnings can be misleading and incomplete. To get a clearer understanding of a company's ability to earn money and reward you, the shareholder, it's often better to focus on cash flow. In this series, we tear apart a company's cash flow statement to see how much money is truly being earned, and more importantly, what management is doing with that cash.

Step on up, Archer Daniels Midland (NYSE: ADM  ) .

The first step in analyzing cash flow is to look at net income. Archer Daniels Midland's net income over the last five years has been impressive:

 

2011*

2010

2009

2008

2007

Normalized Net Income $2.0 billion $1.6 billion $1.1 billion $2.3 billion $1.4 billion

Source: S&P Capital IQ. *12 months ended Sept. 30.

Next, we add back in a few non-cash expenses like the depreciation of assets, and adjust net income for changes in inventory, accounts receivable, and accounts payable -- changes in cash levels that reflect a company either paying its bills, or being paid by customers. This yields a figure called cash from operating activities -- the amount of cash a company generates from doing everyday business.

From there, we subtract capital expenditures, or the amount a company spends acquiring or fixing physical assets. This yields one version of a figure called free cash flow, or the true amount of cash a company has left over for its investors after doing business:

 

2011*

2010

2009

2008

2007

Free Cash Flow ($0.7 billion) ($4.1 billion) ($0.9 billion) $3.6 billion ($3.9 billion)

Source: S&P Capital IQ. *12 months ended Sept. 30.

Now we know how much cash Archer Daniels Midland is really pulling in each year. Next question: What is it doing with that cash?

There are two ways a company can use free cash flow to directly reward shareholders: dividends and share repurchases. Cash not returned to shareholders can either be stashed in the bank, used to invest in other companies, or to pay off debt.

Here's how much Archer Daniels Midland has returned to shareholders in recent years:

 

2011*

2010

2009

2008

2007

Dividends $406
million
$384
million
$360
million
$335
million
$298
million
Share Repurchases $510
million
$186
million
-- $100
million
$458
million
Total Returned to Shareholders $916
million
$570
million
$360
million
$435
million
$756 million

Source: S&P Capital IQ. *12 months ended Sept. 30.

As you can see, the company has repurchased a decent amount of its own stock. But combined with other rounds of share issuance, shares outstanding have actually increased:

 

2011*

2010

2009

2008

2007

Shares Outstanding (millions) 650 641 643 644 645

Source: S&P Capital IQ. *12 months ended Sept. 30.

Now, companies tend to be fairly poor at repurchasing their own shares, buying feverishly when shares are expensive and backing away when they're cheap. Does Archer Daniels Midland fall into this trap? Let's take a look:

Source: S&P Capital IQ.

Archer Daniels Midland has only engaged in share repurchases sporadically over the last five years, so it's hard to get a good feel for management's buying activity. Buybacks peaked in 2007 when shares were high, but that's not quite enough information to tell us whether the move was imprudent or not, since buybacks ever since have been minimal -- even after shares rebounded.

Finally, I like to look at how dividends have added to total shareholder returns:

Source: S&P Capital IQ.

Over the last five years, Archer Daniels Midland shares returned 1%, which drops to -9% without dividends -- not a bad boost to top off otherwise poor returns.

To gauge how well a company is doing, keep an eye on the cash. How much a company earns is not as important as how much cash is actually coming in the door, and how much cash is coming in the door isn't as important as what management actually does with that cash. Remember, you, the shareholder, own the company. Are you happy with the way management has used Archer Daniels Midland's cash? Sound off in the comment section below.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. 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.


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  • Report this Comment On February 13, 2012, at 9:00 PM, mamal11 wrote:

    ADM recently announced layoffs/early retirement incentives in order to reduce expenses. I am concerned about how they can almost double the dividends this year compared to 2010 if they are worried about cutting costs. They have also just announced new purchases of processing facilities in Poland. I don't see where they have the money to re-invest. Are they hedging on future profit?

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