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 important, what management is doing with that cash.
Step on up, Windstream
The first step in analyzing cash flow is to look at net income. Windstream's net income over the last five years has been all over the place:
|
2011 |
2010 |
2009 |
2008 |
2007 |
|
|---|---|---|---|---|---|
| Normalized Net Income | $300 million | $371 million | $426 million | $457 million | $456 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 | $527 million | $679 million | $823 million | $763 million | $668 million |
Source: S&P Capital IQ.
Now we know how much cash Windstream 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, or used to pay off debt.
Here's how much Windstream has returned to shareholders in recent years:
|
2011 |
2010 |
2009 |
2008 |
2007 |
|
|---|---|---|---|---|---|
| Dividends | $510 million | $465 million | $437 million | $445 million | $477 million |
| Share Repurchases | -- | -- | $121 million | $200 million | $40 million |
| Total Returned to Shareholders | $510 million | $465 million | $559 million | $646 million | $517 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 increased:
|
2011 |
2010 |
2009 |
2008 |
2007 |
|
|---|---|---|---|---|---|
| Shares Outstanding (millions) | 513 | 468 | 433 | 441 | 472 |
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 Windstream fall into this trap? Let's take a look:
Source: S&P Capital IQ.
Windstream's buybacks have been scarce and sporadic over the last five years, so this doesn't tell us much. Given reasonable valuations at the time, these buybacks were likely a decent deal for shareholders.
Finally, I like to look at how dividends have added to total shareholder returns:
Source: S&P Capital IQ.
Shares returned 25% over the last five years, which drops to -18% without dividends -- a huge 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 Windstream's cash? Sound off in the comments section below.
- Add Windstream to My Watchlist.
