This morning Jack in the Box (NYSE:JBX) announced that it will repurchase 2.3 million of its shares through a Dutch tender auction at $61 a share. The repurchase represents a substantial 6.5% of the company's outstanding shares.

Share repurchases are interesting beasts. On the surface, they're often thought to be good no matter what since the number of shares outstanding is reduced. But a better way to look at a share repurchase is like any other investment a company can make, and cash should always flow to the investments with the most attractive returns.

Companies such as Limited Brands (NYSE:LTD) and Inside Value selection Microsoft (NASDAQ:MSFT) have made or attempted similar repurchases as part of a restructuring effort or as an opportunistic way to add shareholder value. In Microsoft's case, the company's tender offer was funded with available cash, but in Limited's case, the repurchase was funded largely with debt and was a way of also lowering the average cost of the company's capital, while also returning value to shareholders. Jack in the Box's repurchase appears to be similar to Limited's as the company will up its debt levels and has taken on a new credit facility to support the repurchase, which should lower its average cost of capital.

It's not as clear, however, that the repurchase will add a great deal of value for shareholders. Over the past few years, Jack in the Box has failed to deliver returns on capital above 10%, and from a valuation perspective, I have a tough time defining Jack in the Box shares as undervalued or attractively priced, unless I assume the company will see an improvement in margins from its efforts to continue franchising a larger portion of its stores and make operational improvements.

It's entirely possible management and the board of directors believe that one or both of these items are going to develop soon, but given that the company competes with McDonald's (NYSE:MCD), Wendy's (NYSE:WEN), and Burger King (NYSE:BKC) for customers, I would much prefer that the valuation and returns on capital make this an obvious good use of capital if I were a shareholder. As of right now, it's not clear that will happen, making this repurchase a potentially dangerous use of shareholder funds.

To see what else we've been saying about Jack in the box, check out:

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At the time of publication Nathan Parmelee had no financial position in any of the companies mentioned.