What Scotts Miracle-Gro 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, Scotts Miracle-Gro (NYS: SMG) .
The first step in analyzing cash flow is to look at net income. Scotts Miracle-Gro's net income over the last five years has been impressive:
2011 | 2010 | 2009 | 2008 | 2007 | |
|---|---|---|---|---|---|
Normalized Net Income | $174 million | $189 million | $168 million | $107 million | $154 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 | $30 million | $211 million | $177 million | $160 million | $218 million |
Source: S&P Capital IQ.
Now we know how much cash Scotts Miracle-Gro 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, invested in other companies and assets, or used to pay off debt.
Here's how much Scotts Miracle-Gro has returned to shareholders in recent years:
2011 | 2010 | 2009 | 2008 | 2007 | |
|---|---|---|---|---|---|
Dividends | $70 million | $50 million | $34 million | $33 million | $543 million |
Share Repurchases | $351 million | $50 million | -- | -- | $247 million |
Total Returned to Shareholders | $421 million | $100 million | $34 million | $33 million | $790 million |
Source: S&P Capital IQ.
As you can see, the company has repurchased a decent amount of its own stock. But combined with other rounds of share issuance, shares outstanding have been mostly flat:
2011 | 2010 | 2009 | 2008 | 2007 | |
|---|---|---|---|---|---|
Shares Outstanding (millions) | 63 | 66 | 65 | 65 | 64 |
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 Scotts Miracle-Gro fall into this trap? Let's take a look:
Source: S&P Capital IQ.
Not so hot. Scotts Miracle-Gro repurchased a lot of stock in 2007 when shares were fairly high, pulled way back as they plunged, and returned only after shares rebounded. Whether this was a prudent way to save cash as the economy looked 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:
Source: S&P Capital IQ.
Shares returned 19% over the last five years, which increases to 27% with dividends reinvested -- a small boost to top off otherwise low 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 Scotts Miracle-Gro's cash? Sound off in the comment section below.
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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.Motley Fool newsletter serviceshave recommended buying shares of Scotts Miracle-Gro. The Motley Fool has adisclosure 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.
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