What Marriott 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, Marriott (NYSE: MAR  ) .

The first step in analyzing cash flow is to look at net income. Marriott's net income over the last five years has been all over the place:

 

2011

2010

2009

2008

2007

Normalized Net Income $429 million $392 million $227 million $444 million $650 million

Source: S&P Capital IQ.

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 $906 million $844 million $721 million $284 million $107 million

Source: S&P Capital IQ.

Now we know how much cash Marriott 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 and assets, or used to pay off debt.

Here's how much Marriott has returned to shareholders in recent years:

 

2011

2010

2009

2008

2007

Dividends $134 million $43 million $63 million $115 million $105 million
Share Repurchases $1.4 billion $57 million -- $434 million $1.8 billion
Total Returned to Shareholders $1.5 billion $100 million $63 million $549 million $1.9 billion

Source: S&P Capital IQ.

As you can see, the company has repurchased a decent amount of its own stock. That's caused shares outstanding to fall:

 

2011

2010

2009

2008

2007

Shares Outstanding (millions) 350 363 356 356 380

Source: S&P Capital IQ.

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 Marriott fall into this trap? Let's take a look:

Source: S&P Capital IQ.

This looks pretty bad. Marriott repurchased a lot of stock in 2007 and 2008 when shares were fairly high, pulled way back as they plunged, and returned only after shares rebounded. Whether this was a prudent way to save cash as the economy looked about to implode or a classic example of buying high and panicking low is up for debate. In general, it doesn't appear management has been the most astute buyer of its own stock.

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

Source: S&P Capital IQ.

Shares returned -24% over the last five years, which increases to -16% with dividends reinvested -- a small boost to top off otherwise poor 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 Marriott's cash? Sound off in the comment section below.

Add Marriott to My Watchlist.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On April 05, 2012, at 4:36 PM, rnorich wrote:

    Something does not make sense-They spent 3.6 billion but only repurchased 30 million shares. That comes out to about $120 per share- that would mean they would have issued another 60 million shares

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