My dueling opponent Timothy Otte does a tremendous job of describing the theory behind how buybacks reduce the number of shares outstanding, thereby improving per-share cash flows. That's a very nice theory, and it'd truly be great for shareholders -- if it weren't for a key agency conflict involved in setting executive compensation.

Most boards of directors are picked by the executives of the company. Those same boards decide the executives' pay packages. The temptation to follow "you scratch my back, and I'll scratch yours" is quite strong, especially when dealing with billions of dollars of other people's money. That leads to pay packages with large stock-option grants, followed by heavy buybacks. By mopping up the dilution and supporting the stock price, those buybacks do little more than transfer money from the owners of the company to its managers.

How bad is it? Take a look at the potential options overhang at some well-known companies:

Company

Options Outstanding
(Millions)

Shares Outstanding
(Millions)

Potential Dilution

Apple (NASDAQ:AAPL)

52

870

5.98%

Oracle (NASDAQ:ORCL)

434

5,110

8.49%

Applied Materials (NASDAQ:AMAT)

163

1,380

11.83%

Symantec (NASDAQ:SYMC)

107

883

12.16%

Intel (NASDAQ:INTC)

748

5,840

12.80%

Xilinx (NASDAQ:XLNX)

53

298

17.83%

Cisco Systems (NASDAQ:CSCO)

1,352

6,060

22.31%

That options-related dilution represents the potential buyback needed just to keep your slice of the company the same. Rather than benefiting shareholders, the net buyback money that mops up those shares gets essentially transferred from the shareholders to the folks who've received those options. With buybacks hiding agency conflict costs like that, I'll take a dividend and its current 15% federal tax any day of the week.

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

At the time of publication, Fool contributor Chuck Saletta owned shares of Intel, but after looking at this table, he's having second thoughts about that decision. Both Intel and Symantec are Inside Value selections. The Fool has a disclosure policy.