Dell's Monster Buyback

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Despite all the talk of constriction in the credit markets, Wall Street's buyback binge continues. The latest adherent to the "Corporation, buy thyself" philosophy is twin Motley Fool Stock Advisor and Motley Fool Inside Value recommendation Dell (Nasdaq: DELL). This morning, the computer hawker announced one of the biggest buybacks I've seen in recent months. Looming nearly twice as large as the $5.5 billion behemoth of a buyback that Best Buy (Nasdaq: BBY) announced last summer, Dell will spend $10 billion to repurchase its own shares.

That's really the extent of the news. Dell didn't even go through the motions of arguing why it felt the buyback was a good idea, saying only that this is part of a "long-term share repurchase program" aimed at returning value to shareholders. But let's not let that keep us from asking: Can Dell afford to spend $10 billion on itself? And even if it can, should it? These are the questions we'll look at today.

Can it pay?
No doubt. Actually, Dell could pay off its tab tomorrow if it had a mind to. This cash-rich computer czar carries more than $11 billion in net cash on its balance sheet, and at last report was spinning off free cash flow at the rate of $3 billion per year.

Should it pay?
Yes, again. Viewed both objectively and in comparison to its primary publicly traded rivals, Dell stock looks to offer a fair valuation at today's price.

	P/E	Price-to-Free Cash Flow	Projected Growth Rate
Dell	19	18	13%
Hewlett-Packard (NYSE: HPQ)	19	20	14%
Apple (Nasdaq: AAPL)	46	33	23%
Sony (NYSE: SNE)	27	96	15%

Dell sells for a market multiple on both P/E and free cash flow, yet is expected to grow slightly faster than the rest of the S&P 500, making its price look more than fair. Relative to its competition, P/E ratios are similar for both Dell and HP, and the latter itself announced an $8 billion buyback in last month's earnings release.

Foolish takeaway
Put it all together, and I can support this buyback. The real question is: Considering how closely the major PC makers are grouped on valuation, when will Apple see the value in its shares and announce a buyback of its own?