What Western Union Does With Its Cash

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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, Western Union (NYS: WU) .

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

 

2011*

2010

2009

2008

2007

Normalized Net Income$774 million$753 million$707 million$826 million$764 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$1.1 billion$0.9 billion$1.2 billion$1.2 billion$1.0 billion

Source: S&P Capital IQ. *12 months ended Sept. 30.

Now we know how much cash Western Union 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 either be stashed in the bank, invested in other companies, or used to pay off debt.

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

 

2011*

2010

2009

2008

2007

Dividends$180 million$165 million$41 million$28 million$30 million
Share Repurchases$874 million$581 million$400 million$1.3 billion$727 million
Total Returned to Shareholders$1.1 billion$746 million$441 million$1.3 billion$757 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:

 

2011*

2010

2009

2008

2007

Shares Outstanding (millions)640667699730760

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

anImage

Source: S&P Capital IQ.

There was a fairly big pullback in share repurchases as shares came tumbling down in 2009, but Western Union management has otherwise been reasonably consistent with repurchases regardless of share price. Given decent valuations in relation to earnings and cash flow, these buybacks have likely been a good deal for shareholders.

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

anImage

Source: S&P Capital IQ.

Over the last five years, Western Union shares returned negative 17%, which drops to negative 20% without dividends -- a small boost to top off otherwise poor returns.

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 Western Union's cash? Sound off in the comment section below.

At the time this article was published Fool contributorMorgan Houseldoesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel.Motley Fool newsletter serviceshave recommended buying shares of Western Union. Motley Fool newsletter services have also recommended creating a write covered straddle position in Western Union. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policy.

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