Looking Beyond Dell's Buyback

Buybacks seem to be the in-thing this year, as companies look to put their cash to some use. One of the latest companies to follow the trend has been Dell (NAS: DELL) , whose management authorized an additional buyback of $5 billion in addition to an existing $2.16 billion that still remains to be used.

Let's take a look at the finer aspects of the buyback.

Scanning the buyback
Dell's shares had gained some 9% this year, and the news of the authorization sent shares further up. The company's profit rose by a staggering 63% in the just-concluded quarter on the back of reduced expenses.

Dell's revenue growth in the previous quarter was almost negligible, as the company tries to hold its ground in the face of stiff competition from Acer. Although Dell's sales rose marginally, the company still is languishing behind Hewlett-Packard (NYS: HPQ) and Acer in terms of market share.

Under such tough competitive circumstances, Dell's stock languished to the point where management ostensibly considered it a value. But let's look at how Dell is placed for the upgraded buyback.

The company generated free cash flow of $4.6 billion in the past 12 months, a jump of 32% from the year-ago figure. Cash and short-term investments in the balance sheet stand impressively at $15.1 billion. While Dell's total debt rose significantly by 25% from the year-ago period to $6.8 billion, the company can easily afford it.

But is the stock worth it?



Trailing P/E (TTM)

Forward P/E

















Source: S&P Capital IQ.

The company looks quite cheap compared with its peers -- though perhaps not as cheap as its basket-case rival Hewlett-Packard.

The Foolish takeaway
Strong fundamentals are expected from a company like Dell, and it doesn't disappoint. However, it would have been more encouraging to see the company spend more on product-development initiatives rather than doubling down on its buyback. Dell needs to gear up to stand its ground in the wake of tough competition and flat revenue growth. Dell's shareholders should at least enjoy the ride -- for the time being.

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At the time thisarticle was published Fool contributor Harsh Chauhan owns none of the stocks mentioned in the article. The Motley Fool owns shares of Apple and IBM.Motley Fool newsletter serviceshave recommended buying shares of Dell and Apple and creating a bull call spread position in Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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