What Nordson 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, Nordson (Nasdaq: NDSN  ) .

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

 

2011

2010

2009

2008

2007

Normalized Net Income

$193 million

$164 million

$89 million

$107 million

$89 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

$212 million

$129 million

$181 million

$102 million

$93 million

Source: S&P Capital IQ.

Now we know how much cash Nordson 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, used to invest in other companies and assets, or to pay off debt.

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

 

2011

2010

2009

2008

2007

Dividends

$31 million

$27 million

$25 million

$25 million

$24 million

Share Repurchases

$175 million

$33 million

$1 million

$35 million

$14 million

Total Returned To Shareholders

$206 million

$60 million

$26 million

$60 million

$38 million

Source: S&P Capital IQ.

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 been flat:

 

2011

2010

2009

2008

2007

Shares Outstanding (millions)

67

68

67

67

67

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

Source: S&P Capital IQ.

Not terribly impressive. Nordson didn't have much appetite for its stock when shares were below $30 a share, but gobbled them up at over $40 and $50 a share. Given reasonable valuations, these buybacks will likely be a decent deal for shareholders. Still, management's timing has been far from perfect.

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

Source: S&P Capital IQ.

Shares returned 133% over the last five years, which increases to 150% with dividends reinvested -- 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 Nordson'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. 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.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1857733, ~/Articles/ArticleHandler.aspx, 10/21/2014 5:57:27 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement