Staples Secures Shares

Wall Street's buyback binge continues. Earlier this week, I discussed the billion-buck buyback going on at Analog Devices (NYSE: ADI  ) , and the $2 billion analog to it at Motley Fool Inside Value recommendation Symantec (Nasdaq: SYMC  ) .

Yesterday, retailers began joining in the high-tech fun, with Target (NYSE: TGT  ) announcing the next logical number in our progression -- $3 billion -- for its own buyback, and paperclips-and-printer-paper hawker Staples (Nasdaq: SPLS  ) taking a step back from that point with a $1.5 billion plan. It's that last one we'll talk about today.

As investors already know, Staples had a $1.5 billion buyback plan in place already, but it had burned through $1.2 billion of its authorization and decided a re-up was in order. Hence, on Thursday, it announced that the old plan was being canceled and replaced with a shiny new one of the same size as the original -- $1.5 billion. So without further ado, let's proceed to the two key questions of the hour:

Can it pay?
Sure can. Staples has nearly $1.3 billion in cash in the bank, against just $0.5 billion in debt. With $660 million in trailing free cash flow, the firm's current funds, when combined with the money coming in the door, should suffice to just about cover the entire buyback authorization over the coming year. Based on these numbers, CEO Ron Sargent argues that the firm's "strong balance sheet gives [Staples] the flexibility to ... return excess cash to shareholders."

Speaking of flexibility, the buyback plan itself is pretty malleable, permitting but not requiring any repurchases, and carrying the proviso that it "may be suspended or discontinued at any time." As such, this is one of those buybacks that looks less like management capitalizing on a depressed share price (although Staples is, in fact, lagging the market by about 18 points over the past year), and more like a PR announcement expressing confidence in the future.

Should it pay?
After reviewing Staples' valuation, and comparing it with those of its competitors, though, I suggest that management keep its wallet in its pocket. Enjoy the PR, but hold on to the cash. See for yourself:

Company	P/E Ratio	Price-to-Free Cash Flow	Projected Growth Rate
Staples (Nasdaq: SPLS  )	18	27	15%
Office Depot (NYSE: ODP  )	18	15	15%
OfficeMax (NYSE: OMX  )	18	24	16%

From a straight P/E-versus-growth rate perspective -- the venerable "PEG" ratio -- neither Staples nor any of its competitors appears to present an obvious bargain here. They're at best properly valued, leaning a bit on the pricey side. And when considered in terms of free cash flow, Staples is actually the most expensive of the bunch.

In a situation like this, I just don't see a compelling reason for Staples to buy back shares. If management really wants to "return excess cash to shareholders," it should do it the old-fashioned way: Raise the dividend.

As things stand today, Staples' tiny 1.2% yield doesn't stand a chance of ever qualifying the stock for inclusion in the Motley Fool Income Investor portfolio. The price of admission for stocks is usually at least a 3% dividend. The price of admission for investors, meanwhile, is free for one month.

Fool contributor Rich Smith does not own shares of any company named above. The Fool has a disclosure policy.