What R.R. Donnelley 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 important, what management is doing with that cash.

Step on up, R.R. Donnelley (NAS: RRD) . 

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

 

2011

2010

2009

2008

2007

Normalized Net Income$308 million$310 million$308 million$623 million$582 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$695 million$523 million$1.2 billion$695 million$699 million

Source: S&P Capital IQ.

Now we know how much cash R.R. Donnelley 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 R.R. Donnelley has returned to shareholders in recent years:

 

2011

2010

2009

2008

2007

Dividends$205 million$214 million$214 million$219 million$227 million
Share Repurchases$500 million----$279 million$310 million
Total Returned to Shareholders$705 million$214 million$214 million$498 million$537 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)194206205210218

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 R.R. Donnelley fall into this trap? Let's take a look:

anImage

Source: S&P Capital IQ.

Sure enough, R.R. Donnelley bought back a lot of stock in 2007 and 2008 when shares were fairly high, none in 2009 when they plunged, and came rushing back with buybacks after shares rebounded nearly 100%. Whether this was a prudent way to save cash as it looked like the economy was 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:

anImage

Source: S&P Capital IQ.

Shares returned -53% over the last five years, which drops to -65% without dividends. In other words, dividends provided a small boost to otherwise awful 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 R.R. Donnelley's cash? Sound off in the comments 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.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 a disclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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