Wall Street's buyback binge continues. Earlier in this earnings season, we brought you news of buyback programs at retailers Staples (NASDAQ:SPLS), Target (NYSE:TGT), and Best Buy (NYSE:BBY). Apparently, though, the idea has not yet run its course, and last evening, yet another retailer decided to join the fun.

Fresh from completing its last buyback of $1 billion worth of shares, Nordstrom (NYSE:JWN) announced yesterday that it's digging into its purse for another $1.5 billion worth of spare change with which to finance a shopping spree on its own shares. Management expects to spend through the authorized amount over the course of the next 24 months. An impressive statement of self-confidence? No doubt. But the real questions are: Can Nordstrom afford the buyback? And perhaps more importantly, should it? That's what we're here to find out.

Can it pay?
Not without going (further) into debt, it can't. For while Nordstrom has nearly $745 million in cash in the bank, the firm also carries a debt load approaching $1.5 billion. What's more, trailing free cash flow amounts to just $353 million -- insufficient to cover even half the cost of the buyback program within the allotted two years.

Conclusion: To finance its spending spree, Nordstrom will need to approach its bankers for a loan. And considering the condition of the credit markets right now, I'm thinking the costs of the loan may outweigh the benefits.

Should it pay?
Reviewing Nordstrom's most recent quarterly results, fellow Fool Ryan Fuhrmann pronounced them "solid." Yet looking at the same numbers, I have to say I am less than impressed with the company's valuation. Maybe I'm too much of a cheapskate to fit in with Nordstrom investors (I certainly don't fit its customer demographic). But a P/E of 17 and a price-to-free cash flow ratio of 33 are both too rich for my blood -- especially when paired with a business where analysts expect to see profits grow at just 13% per year over the next five years.

Granted, I see some logic to the buyback when you compare Nordstrom to its rivals:


Price-to-Free Cash Flow

Projected Growth Rate





Macy's (NYSE:M)








Dillard's (NYSE:DDS)




Saks, with negative free cash flow, bought back no shares last quarter. Dillard's has not yet reported, so we don't know what it's up to. Macy's -- the most comparable stock -- has a slightly slower projected growth rate and a slightly lower valuation, and is buying back its own shares hand over fist -- $900 million last quarter, and another $1.25 billion slated to be spent by the end of the fiscal year.

But you remember what your mom told you about jumping off bridges, right? Well, it works with share buybacks, too. Just because one of your friends is wasting shareholder capital, buying back overpriced shares, doesn't mean you should do it too. Nordstrom, put your credit card back in your purse. You're better off waiting for a red-tag sale on these shares.

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Fool contributor Rich Smith does not own shares of any company named above. Best Buy is a Stock Advisor pick. The Motley Fool has a disclosure policy.