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, VF Corp.
The first step in analyzing cash flow is to look at net income. VF Corp.'s net income over the last five years has been impressive:
|
2011* |
2010 |
2009 |
2008 |
2007 |
|
|---|---|---|---|---|---|
| Normalized Net Income |
$700 million |
$591 million |
$485 million |
$530 million |
$567 million |
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 | $388 million | $890 million | $888 million | $554 million | $707 million |
Source: S&P Capital IQ. *12 months ended Sept. 30.
Now we know how much cash VF Corp. 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 be stashed in the bank, invested in other companies, or used to pay off debt.
Here's how much VF Corp. has returned to shareholders in recent years:
|
2011* |
2010 |
2009 |
2008 |
2007 |
|
|---|---|---|---|---|---|
| Dividends | $275 million | $264 million | $262 million | $255 million | $247 million |
| Share Repurchases | $97 million | $412 million | $112 million | $150 million | $350 million |
| Total Returned to Shareholders | $371 million | $676 million | $374 million | $405 million | $597 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. That's caused shares outstanding to fall, if only slightly:
|
2011* |
2010 |
2009 |
2008 |
2007 |
|
|---|---|---|---|---|---|
| Shares Outstanding (millions) | 109 | 109 | 110 | 109 | 110 |
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 VF Corp. fall into this trap? Let's take a look:
Source: S&P Capital IQ.
VF has been sporadic with its buybacks, so this doesn't tell us much. Given reasonable valuations -- a solid share performance since its largest buybacks -- these repurchases have likely been a good deal for shareholders.
Finally, I like to look at how dividends have added to total shareholder returns:
Source: S&P Capital IQ.
Shares returned 117% over the last five years, which drops to 85% without dividends -- a nice boost to top off already high performance.
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 VF Corp.'s cash? Sound off in the comment section below.
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