Cash Flows from Financing Activities on the Statement of Cash Flows are the window to the soul of the company.
Because it is last section of the last financial statement, a lot of people never get into it or use it.
This Cash From Financing section provides a simple insight into how friendly a management team is to shareholders.
It also provides a glimpse into what management really thinks about the company and its long term prospects.
Actions speak louder than words.
Let’s take a look at Accenture (ACN).
Below is their Financing Activity for the last 10 years (source: Old School Value Stock Analyzer)
Accenture is doing two things that shareholders should love.
- They are paying a dividend
- They are buying back shares
Both items reflect a conscious effort by management to reward shareholders.
If you look deeper, you see something even better: consistency.
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The Importance of Consistency
Every year for the last ten years, Accenture bought back shares. In fact, they are increasing their share buybacks at a regular and steady pace.
Accenture is actually dollar-cost-averaging (DCA) their share purchases.
When the market is up, they buy fewer shares. When the market is down, they buy more.
The goal with DCA is to lower your cost basis by buying more shares at lower prices. With Accenture consistently buying back, you get more value from your shares even though you hold the exact same amount.
Fewer slices of the pie means your slice is larger.
It also means there is a floor to the share price. The day to day fluctuations of a stock price is dictated by supply and demand. But having a steady buyer out there provides a floor on the stock.
If the price drops too low, the company is there scooping up more and more shares to your benefit.
It’s an odd sort of peace when you’re happy with the stock price dropping.
A lot of companies buy back shares when they have a lot of extra cash on hand. The problem is that this usually correlates with higher stock prices.
The company doesn’t buy the stock when the market is down, but buys it when it is high.
This is a recipe for destroying shareholder value.
Companies sometimes resort to rewarding shareholders through buybacks when the sudden surge of cash isn’t sustainable. That’s because it’s better than cutting the dividend and watching the stock price get killed. It’s dangerous ground for management.
That’s why they buy high and not low.
Take a look at a counter example: AT&T (T)
Here’s a comparison of how the stock fared side by side during the bloody period.
Now bear in mind, I have no ill will towards AT&T or their business.
I think it a great company and a strong dividend investment.
The point is that when Mr. Market was having a temper tantrum, AT&T could have bought shares at ridiculously low prices.
AT&T were actually net sellers of shares during this time. It wasn’t that they didn’t have the cash. They were paying out dividends the whole time at an increasing rate.
From 2012 when the market was on fire with prices at all-time highs, AT&T ramped up share buybacks.
Welcome to the party, but we’re about to close the bar.
Same thing happened in 2007 and 2008.
Yes AT&T had some challenges in 2009-2011, but they weren’t in critical condition. 2009-2011 was the perfect time to buy a great investment management understood at a cheap price.
To do so is a value investor’s dream.
Here’s What To Look For
The point I want you to take away is that share buybacks are great. But consistent share buybacks are even better.
Such stocks reduce volatility in your portfolio and provide an indication of how prudent management is with your capital (it is YOUR capital Mr. and Ms. Shareholder).
Looking at the stock price performance tells you consistency wins.
Accenture has significantly less volatility than AT&T.
Also, those buybacks in 2009-2011 are really paying off while AT&T is buying again at high prices.
Next time, take a look at how and when management is buying back shares.
Are they consistent or are they buying in fits and starts?
Consistency indicates that the company has a plan to reward you. It is also an indication that the company is generating cash flow organically at a steady pace.
Friends like AT&T come and go in life. But companies like Accenture are your best friends who are there for the long haul.
Author is long ACN