Hey, Chuck, you make a good case with some pretty smooth arguments. Hope you won't mind my following through on the Star Wars title theme. In The Empire Strikes Back, the bad guys (dividends) get the upper hand for a while, but in Return of the Jedi, the good guys (share buybacks) finally triumph.

Also hope you won't mind if I point out some inconsistencies in your logic. I would hate to work for a company that had to ensure that every capital project returned more than the personal hurdle rate for each stock investor. I'd never get anything done, having to constantly be calling Chuck Saletta and the other shareholders to find out what their hurdle rate is this week.

I hear your argument about companies only buying back shares if their stock is undervalued. That idea is great in theory but useless in practice. If we all knew the real value of every stock, there would be no need for The Motley Fool -- or 99% of the people who work on Wall Street, for that matter. 

Starbucks (NASDAQ:SBUX) traded at $39.43 last November. It closed at $27.16 last Friday.  Is the stock dramatically undervalued today, or was it dramatically overvalued last November?  There are a lot of investors on both sides of this question. I suspect the truth is somewhere in between, but the point is no one will know "the truth" for a few years. It's impossible for companies to manage share repurchase programs based on "knowledge" of whether their stock is fairly valued.

Let's also take a closer look at the companies you classify as great investments because of their dividend policies. Below is their change in stock price (total and compound annual growth rate) over the past 10 years:

Company

9/12/97

9/7/07

% Change

CAGR

Bank of America (NYSE:BAC)

           29.50

           49.02

66.2%

5.2%

Fifth Third Bankcorp (NASDAQ:FITB)

           27.13

           34.77

28.2%

2.5%

General Electric (NYSE:GE)

           22.08

           38.75

75.5%

5.8%

General Growth Properties (NYSE:GGP)

             9.97

           49.25

394.0%

17.3%

Harley-Davidson (NYSE:HOG)

           13.25

           49.09

270.5%

14.0%

Kinder Morgan (NYSE:KMP)

           17.53

           50.34

187.2%

11.1%

Lowe's (NYSE:LOW)

             4.93

           29.43

497.0%

19.6%

1 share of each stock

       124.39

       300.67

141.7%

9.2%

These seven companies average a dividend yield today just under 3%. A purchase of one share of each company 10 years ago would have yielded over 9% compound annual return from price appreciation. Now, perhaps some of that price appreciation has been due to paying dividends, but I would argue the majority of it is caused by growth, skillful management, and the active share repurchase programs that five of the seven employ.

It's not that I think dividends are a bad thing, Chuck. Returning cash flow to shareholders is far preferable to squandering it, and dividends are one way to accomplish the goal. But they're simply a less efficient and effective method than share repurchase. In my years as corporate treasurer, I've frequently kept dividend policies in place at the same time as we were buying back shares, for the simple reason that there are some investors out there who firmly believe in dividends. Casting a wider net has a better chance of increasing the stock price, which is the real goal of every company.

For more info on companies buying back shares, check out:

You're not done yet! Read the other arguments and vote for the winner.

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Fool contributor Timothy M. Otte surveys the retail scene from Dallas. He welcomes comments on his articles. Timothy owns shares of Starbucks, but none of the other companies mentioned in this article.