What Estee Lauder Does With Its Cash

Before you go, we thought you'd like these...
Before you go close icon

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, Estee Lauder (NYS: EL) .

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

 

2011

2010

2009

2008

2007

Normalized Net Income$828 million$613 million$512 million$422 million$448 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$742 million$537 million$870 million$190 million$385 million

Source: S&P Capital IQ.

Now we know how much cash Estee Lauder 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 Estee Lauder has returned to shareholders in recent years:

 

2011

2010

2009

2008

2007

Dividends$204 million$148 million$109 million$108 million$107 million
Share Repurchases$746 million$362 million$78 million$112 million$830 million
Total Returned to Shareholders$950 million$510 million$187 million$221 million$937 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, if only slightly:

 

2011

2010

2009

2008

2007

Shares Outstanding (millions)392395394390393

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 Estee Lauder fall into this trap? Let's take a look:

anImage

Source: S&P Capital IQ.

Not bad. Estee Lauder's largest buyback of the last five years came when shares were fairly low. Current valuations are not exactly cheap, so the recent ramp up in share repurchases isn't particularly inspiring. In general, however, management has done a decent job with share repurchases.

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

anImage

Source: S&P Capital IQ.

Shares returned 169% over the last five years, which drops to 152% without dividends -- a nice boost to top off already high 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 Estee Lauder'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. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners