Despite all the talk of constriction in the credit markets, Wall Street's buyback binge continues. That's understandable when a company has plenty of cash on hand to fund its share repurchases, as we saw with Atmel earlier this week. It's almost understandable when the firm boasts free cash flow sufficient to the purpose, as Mattel (NYSE:MAT) does. But it's scarcely understandable at all when management proposes to hit up its bankers for a loan in order to buy back its shares, as at Best Buy (NYSE:BBY).

So when cosmetic pharmacist Medicis (NYSE:MRX) announced a $200 million buyback yesterday, I wondered which of those three situations applied. Can Medicis pay its own way? And even if it can, should it?

Can it pay?
Yes, absolutely. Even with $453 million long-term debt against its nearly $600 million cash balance. Medicis' debt doesn't mature for many years. Drawing down its sizable cash position by $200 million is not a concern, since the company won't have to worry about debt repayment in the near future. Medicis' leverage does not bother me, since its operating income easily covers its interest expense, and the company generates tons of free cash flow.

Medicis can fund its entire buyback without causing undue strain on its balance sheet, and it's a good use of its cash right now.

Should it pay?
At first glance, that's more than a little iffy. Priced at 77 times trailing earnings, Medicis certainly looks like one high-priced stock today. But patience, dear Fool. Take a second glance at this:


Price-to-Free Cash Flow

Projected Growth Rate





Allergan (NYSE:AGN)




Bristol-Myers (NYSE:BMY)




Schering-Plough (NYSE:SGP)




GlaxoSmithKline (NYSE:GSK)




Foolish takeaway
Pricey as its P/E appears, Medicis is by far the most attractively priced stock on this list when valued based on its free cash flow. Not only does the stock fetch the lowest multiple to free cash flow of any of its peers, but it's also expected to grow its profits faster than any of these rivals. Combined, Medicis' low price and high growth rate suggest a real steal of a deal. In fact, I'm almost thinking that management should take on a bit of debt to buy up even more of its stock on the cheap.

Mind you, I'm no expert on Medicis, so I'd caution you to do your own due diligence on the stock before following management's lead and buying these shares. That said, my first impression is that this opportunity looks quite attractive indeed.

Fool contributor Rich Smith does not own shares of any company named above. Best Buy is a Stock Advisor recommendation. GlaxoSmithKline is an Income Investor recommendation. The Motley Fool's disclosure policy always looks good.