What Pitney Bowes 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, Pitney Bowes (NYSE: PBI  ) .

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

�	2011*	2010	2009	2008	2007
Normalized Net Income	$437 million	$448 million	$464 million	$571 million	$578 million

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

Next, we add back in a few noncash 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	$884 million	$832 million	$657 million	$772 million	$815 million

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

Now we know how much cash Pitney Bowes 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, or to pay off debt.

Here's how much Pitney Bowes has returned to shareholders in recent years:

�	2011*	2010	2009	2008	2007
Dividends	$300 million	$301 million	$298 million	$292 million	$289 million
Share Repurchases	$100 million	$100 million	--	$333 million	$400 million
Total Returned to Shareholders	$400 million	$401 million	$298 million	$625 million	$689 million

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

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)	203	206	207	208	218

Source: S&P Capital IQ. *12 months ended Sept. 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 Pitney Bowes fall into this trap? Let's take a look:

Source: S&P Capital IQ.

Sure enough, Pitney bought back a lot of stock in 2007 and 2008 when shares were fairly high, none in 2009 when the stock plunged, and very little ever since as shares continued getting cheaper. 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:

Source: S&P Capital IQ.

Shares returned -49% over the last five years, which is admittedly awful performance. But without dividends, that figure would drop to -61%.

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 Pitney Bowes' cash? Sound off in the comments section below.

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