Australian Agricultural Company Ltd (ASX: AAC) is a beef and agricultural product producer with properties throughout Queensland and the Northern Territory. Listed in 2001, the company has recently undergone significant transition through a vertical integration strategy.
This has included the completion of its Livingstone processing facility near Darwin in 2015 and an increasing focus on exporting branded beef such as Wagyu, rather than live cattle exports.
AACo has been profitable for its last three financial years; generating about $150m NPAT since 2015, however it has not distributed any of this profit to shareholders. In fact, the company hasn't paid a dividend since 2008.
Earnings for the last two periods have been at its highest level since listing, so why haven't shareholders been rewarded?
I think the issue lies with AACo's ability to generate Free Cash Flow to Equity (FCFE), in other words cash available to shareholders once investment in the business has been completed and finance providers paid.
For the full year reporting period to 31 March 2017, AACo booked revenues of $747m which included $300m of cattle fair value adjustments. This type of adjustment is not unusual for agricultural companies, as livestock becomes more valuable as it grows from birth.
However, as this is a non-cash adjustment, it adds to profit but does not improve the company's cash position. Additionally, AACo recognises fair-value adjustments for property which can be another non-cash contributor to profit.
Through further analysis I found AACo's FCFE was quite low if net new borrowing was subtracted, leading me to believe this is a key reason why the company hasn't paid a cash dividend, despite turning a decent profit.
While AACo appears to be on the right track with its business transformation, I won't invest until the company is able to generate free cash flow over a sustained period.
Foolish takeaway
Foolish investors should expect to receive a significant share of profits from stable, mature companies without distributions negatively impacting the business. A company cannot continue to operate and pay dividends without cash and as such, generating free cash flow is just as important as producing a healthy profit.
