Best Buyback?

Wall Street's buyback binge continues. Last week, we discussed billion-dollar-plus buyback programs initiated byAnalog Devices,Symantec, Staples (Nasdaq: SPLS), and Target (NYSE: TGT). Yesterday, Motley Fool Stock Advisor recommendation Best Buy (NYSE: BBY) joined in the fun, nearly quadrupling the size of its year-old 2006 repurchase plan.

How much is Best Buy buying? $5.5 billion. And it's throwing in a 30% dividend hike for good measure. Yowza! These guys certainly know how to buy off investors disappointed in last quarter's earnings. (Or, for the less cynical among you, how to reward investors for their patience while management rights the ship.) But can management find the scratch to secure shareholders' loyalty? And perhaps more importantly, should it? That's what we're here to find out.

Can it pay?
Yes -- with a little bit of help from its friends at Goldman Sachs (NYSE: GS) and JPMorgan (NYSE: JPM). Best Buy has nearly $2.8 billion in cash in the bank, against just $0.7 billion in debt. Management didn't include a cash flow statement with its earnings release, and has not yet made its 10-Q filing with the SEC, so we don't have up-to-date information on its cash flow. Assuming it's consistent with what Best Buy generated over the previous 12 months, though, the firm is probably minting about $1 billion per year.

Factor in the dividend increase, which obligates Best Buy to pay $250 million per year directly to shareholders, and the firm could probably reclaim no more than $2.9 billion of its shares over the next 12 months. It would probably take three or four years to complete this program with its own resources. That's where the bankers come in.

If I'm reading between the lines of the press release correctly, Goldman will sell Best Buy many of the shares to be repurchased, and JPMorgan will finance the program with a new $2 billion loan. That should be enough for Best Buy to complete the full repurchase within as little as 18 months, should it choose to do so.

Should it pay?
As investors already know, Best Buy has had a $1.5 billion buyback plan in place since June of last year, of which it had burnt through about $700 million at last report, at an average price of just less than $48 per share. Best Buy's shares hit a post-earnings-news bottom at $44.24 per share on June 21 -- about a 7% discount to the average price at which the company's been buying back shares over the past year. Investors can certainly wish that their company's board was a bit more Johnny-on-the-spot with its buyback announcement, but even at today's share price of nearly $47, they'll be getting a small discount to the share price of yesteryear. The question: Is it too small to justify a nearly fourfold increase in the buyback plan?

Let's compare Best Buy to a couple of its rivals:

The way I see it, neither Best Buy, nor its biggest rivals, look particularly like screaming buys based on their numbers of the past 12 months. (Caveat: For Best Buy and Circuit City, the free cash flow numbers are out of date by one quarter, while we await the cash flow statements.) That said, of the three, Best Buy certainly looks the most reasonably priced relative to its peers. So I can see the logic behind management's upping the buyback plan -- relatively.

I just don't find it objectively compelling.

Fool co-founder and Motley Fool Stock Advisor co-lead analyst David Gardner has chosen Best Buy for his side of the Stock Advisor portfolio. Does he agree with management on the buyback plan, or side with Rich? We just published our semiannual update on all of David's recommendations, complete with his thoughts on Best Buy. Read it for free with a 30-day trial to the service.

Fool contributor Rich Smith does not own shares of any company named above. Symantec is an Inside Value pick. The Fool has a high-tech disclosure policy.