What Sara Lee Does With Its Cash


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, Sara Lee (NYS: SLE) .

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

Normalized Net Income

$473 million

$402 million

$550 million

$506 million

$476 million

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

Free Cash Flow

$127 million

$331 million

$796 million

$231 million

$143 million

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

Now we know how much cash Sara Lee 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, used to invest in other companies, or to pay off debt.

Here's how much Sara Lee has returned to shareholders in recent years:


$280 million

$371 million

$307 million

$299 million

$293 million

Share Repurchases

$940 million

$1.2 billion


$223 million

$391 million

Total Returned to Shareholders

$1.2 billion

$1.6 billion

$307 million

$522 million

$684 million

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

As you can see, the company has repurchased a decent amount of its own stock. That's caused shares outstanding to fall:

Shares Outstanding (millions)






Source: S&P Capital IQ. *12 months ended Oct. 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 Sara Lee fall into this trap? Let's take a look:


Source: S&P Capital IQ.

This doesn't tell us much. Sara Lee has been sporadic with its buybacks, with most of its repurchases over the last five years occurring in the last two. Given what looks like reasonable valuations in relation to earnings and cash flow, Sara Lee's recent buybacks have likely been a decent deal for shareholders.

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


Source: S&P Capital IQ.

Over the last five years, Sara Lee shares returned 36%, which drops to 15% without dividends -- not a bad boost to top off already decent 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 Sara Lee's cash? Sound off in the comment section below.

At the time thisarticle 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.

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