What Darden Restaurants 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, Darden Restaurants (NYS: DRI) .         

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

 

2011

2010

2009

2008

2007

Normalized Net Income$381 million$390 million$353 million$308 million$317 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$82 million$313 million$555 million$202 million$322 million

Source: S&P Capital IQ.

Now we know how much cash Darden Restaurants 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 used to pay off debt.

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

 

2011

2010

2009

2008

2007

Dividends$201 million$167 million$132 million$108 million$108 million
Share Repurchases$494 million$345 million$29 million$139 million$199 million
Total Returned to Shareholders$695 million$512 million$161 million$246 million$308 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)134138139138141

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

anImage

Source: S&P Capital IQ.

This is a mixed bag. Most of Darden's buybacks are fairly consistent regardless of share price, except for one period: 2009, when shares were fairly cheap. All in all, given reasonable valuations, these buybacks have likely been a decent deal for shareholders.

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

anImage

Source: S&P Capital IQ.

Shares returned 54% over the last five years, which drops to 34% without dividends -- a nice boost to top off already decent 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 Darden Restaurants' 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.The Motley Fool owns shares of Darden Restaurants. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering 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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