What John Wiley & Sons 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, John Wiley & Sons (NYS: JW.A) .                                                                                   

The first step in analyzing cash flow is to look at net income. John Wiley & Sons' net income over the past five years has been impressive:

 

2011

2010

2009

2008

2007

Normalized Net Income $151 million $146 million $130 million $116 million $91 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 $296 million $227 million $406 million $202 million $257 million

Source: S&P Capital IQ.

Now we know how much cash John Wiley & Sons 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 John Wiley & Sons has returned to shareholders in recent years:

 

2011

2010

2009

2008

2007

Dividends $46 million $37 million $32 million $29 million $25 million
Share Repurchases $78 million $10 million -- $35 million $4 million
Total Returned to Shareholders $125 million $47 million $32 million $64 million $29 million

Source: S&P Capital IQ.

The company has repurchased a decent amount of its own stock. But combined with other rounds of share issuance, shares outstanding have actually increased:

 

2011

2010

2009

2008

2007

Shares Outstanding (Millions) 60 60 58 58 58

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 John Wiley & Sons fall into this trap? Let's take a look:

anImage

Source: S&P Capital IQ.

Not great. The company repurchased a lot of stock in 2008, when shares where high, bought none as they plunged in 2009, and came back with buybacks after shares rebounded. 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 13% over the past five years, which increases to 21% with dividends reinvested -- a nice 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 John Wiley & Sons' cash? Sound off in the comments section below.

At the time this article was published Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter, where he goes by @TMFHousel. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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