Yes, but sane CFOs have to evaluate "what's the best use for this money?" and trade off share buy-backs (or overt dividend declarations) against other investments the company could make.

So, it's perfectly reasonable to say that any investment with dramatically worse return than a share buy-back is a financial loser. If you'd like to argue it's a strategic winner, then change the time window or otherwise make the financial analysis take those strategic gains into account (with an appropriate discount to compare NPVs).

> Yes, but sane CFOs have to evaluate "what's the best use for this money?" and trade off share buy-backs (or overt dividend declarations) against other investments the company could make.

Sure. That means they decide between investing a certain amount of capital in some projects, or returning that capital to the investors.

> So, it's perfectly reasonable to say that any investment with dramatically worse return than a share buy-back is a financial loser.

Not, it's not reasonable. Investing on a project has return for the company, but dividends or buybacks don't. They're in a different category. I think OP wanted to say "it would have been better to invest the money at the risk-free rate than investing on that project".

CFOs are paid to and should be evaluated on creating/optimizing returns for the owners of the company (the shareholders).

If the return from a project for the company (and the therefore the shareholders) is greater than that of a dividend/buyback, do the project. If the dividend/buyback is the idea with the best return, do that.

This evaluation works whether on a projected/discounted look-forward basis or a backward looking basis. In both cases, you have to model assumptions about the path not taken.

Note that most established companies have a portfolio of ideas. Few operating companies return most of their net profits to shareholders. (some companies setup as financial instruments do/must, and whether a REIT is an operating company or not is a question, but Microsoft certainly is an operating company and returning 100% of net profits, even if that were the best idea they had on first-order evaluation, would be a terrible idea.)

It increases the stock price and is known to have a signifcant positive effect whenver a buybackplan is announced

It does this only because the market thinks that management thinks the shares are undervalued. If things are "efficient" then a buyback and dividend are equivalent Conversely, if shares are overvalued then a dividend payment is better for management.

At any rate, the relevant thing to compare Microsoft's investments to is the opportunity cost of the money. If Ballmer spent ten billion dollars on a project that netted only a 3% ROI, then shareholders would have been better off receiving that money and putting it into other companies.

Theoretically but dividends are also taxed and that makes dividends less attractive as an option

Dividends are taxed at the same rate as capital gains, so it should make little difference to a shareholder if a company paid him 1000 dollars or raised the resale value of his stock by 1000 dollars.

No, because your forced to pay capital gains early thus having less money to compound. Try simulating it with 10% growth vs 5% dividend (which is used to buy the same stock) and 5% growth for 10 years.

I meant in terms of the corporation, buyback vs dividends, buyback will have a greater impact because of the tax factor