McKesson (MCK)

McKesson Corp announced a replenishment of its $250 million share buyback authorization.

Many investors greet share buyback announcements with some jubilation, yet ultimately, we have to investigate what is being created in shareholder value versus what is being given up. It is also important to determine the effectiveness of share buybacks...i.e. is there a reduction in shares outstanding or is it used to merely sop up employee stock options?

In the last 8 quarters, MCK has issued a total of $1.17 billion in common stock. The sharecount on a fully diluted basis has expanded to 316 million shares by the end of Sept 2005 versus 298.7 million 8 quarters ago. In the same period, the company bought back $628 million in common stock, for a net issuance of almost $550 million in stock.

The return on invested capital has been negative for the last four quarters. Clearly, there seems to be little reason for the company to reinvest in itself given such a return. Seemingly, insiders agree. In the last 24 months, insiders have sold, net of modest purchases, 1,014,160 shares of stock.

On the plus side, the company does generate tremendous free cash flow, with FCF in excess of $1.25 billion in FY ended March 05 and another $1.86 billion generated in the last six months!

With a paltry yield of 0.48%, a seemingly ineffective share buyback program, and negative returns on invested capital, it surprises me that shareholders wanted to celebrate the announcement.