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, Robert Half
The first step in analyzing cash flow is to look at net income. Robert Half's net income over the last five years has been all over the place:
|
2011 |
2010 |
2009 |
2008 |
2007 |
|
|---|---|---|---|---|---|
| Normalized Net Income |
$156 million |
$72 million |
$42 million |
$262 million |
$307 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 |
$200 million |
$141 million |
$199 million |
$374 million |
$327 million |
Source: S&P Capital IQ.
Now we know how much cash Robert Half 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 Robert Half has returned to shareholders in recent years:
|
2011 |
2010 |
2009 |
2008 |
2007 |
|
|---|---|---|---|---|---|
| Dividends |
$80 million |
$77 million |
$72 million |
$69 million |
$66 million |
| Share Repurchases |
$168 million |
$155 million |
$150 million |
$245 million |
$453 million |
| Total Returned To Shareholders |
$248 million |
$232 million |
$222 million |
$314 million |
$518 million |
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) |
140 |
143 |
146 |
152 |
160 |
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 Robert Half fall into this trap? Let's take a look:
Source: S&P Capital IQ.
This is a mixed bag. Robert Half's largest buybacks of the last five years occurred when shares were at their peak. But it looks like the subsequent dropoff in buybacks was caused by a fall in free cash flow, not management's behavior toward market swings. That's an encouraging sign.
Finally, I like to look at how dividends have added to total shareholder returns:
Source: S&P Capital IQ.
Shares returned -10% over the last five years, which increases to -1% with dividends reinvested -- a small boost that almost gets its otherwise low performance to breakeven.
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 Robert Half's cash? Sound off in the comment section below.
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