I agree that MRK would have used its cash flow more wisely if they had bought some biotech outfits to enlarge their product pipeline.
The point I am trying to make is that you insist companies buy back their share only if it is trading at a discount to book. Stocks that are indeed trading at a discount to book are generally the ones of companies with mediocre business characteristics. Companies that are displaying superior business characteristics are generally trading at more or less high multiples to book value.
During the last 4 fiscal years Dell was achieving a return on total capital (well, pre-tax) of between 40 and 50%.
If the company were trading at book value I could go out, finance their takeover with 100% debt and use their free cash flow to pay that back. With an after-tax return on total capital of maybe 30% I'd be debt free within three years, own a company that posesses about $ 12bn in cash and investments and that makes me $ 2bn plus every year. Of course the market is not stupid enough to give me that opportunity. Hence the stock trades at a significant multiple to book.
I think stating that Dell is a company that is not creating wealth for its shareholders is a gross understatement. Even though they spent about $ 10 bn for stock buybacks during the last 4 fiscal years they still increased cash/cash equivalents and investments from about $ 8 bn to $ 12 bn during that time (almost double shareholders' equity which was lowered by the re-purchase of stocks).
The point is, companies that do trade around or below book value by and large do not generate the free cash flow that would allow them to buy back their own shares. Those companies that do generate the sizeable free cash flows do not trade at a discount to book value, never. And rightly so.
It's as simple as that.
Quite obviously Dell has generated a significant amount of wealth for its shareholders:
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