Buyback enthusiasts will tell you a bunch of reasons for justifying these purchases and one of the most common is that this is “the best use of the corporate cash.” So to evaluate that, let’s look at the company that has probably bought more of its own shares than anyone else in the past few years.

Microsoft has repurchased approximately $71.2 billion worth of its shares from Fiscal 2002 until June 30, 2007. The value of those purchases has risen about 6% in the past 6 years. A whopping 6% vs. about 18% for the S&P 500 over the same time period. In the most recent quarter ended June 30, 2007 - the repurchases are actually under water. Compared to the S&P 500, investing in MSFT was not the best use of cash.

So what else has MSFT been doing with their cash since Fiscal 2002? According to their filing - here you go:

We make significant investments in new products and services that may not be profitable. We have made and will continue to make significant investments in research, development, and marketing for new products, services, and technologies, including Windows Vista, the 2007 Microsoft Office system, Xbox 360, Live Search, Windows Server, Zune, and Windows Live. Investments in new technology are inherently speculative.

“Inherently speculative” - you got that right. The Zune, the Xbox, IPTV - the Entertainment and Devices Division has been a giant failure and yet, after losing over $6 billion since 2002 I am continually confused why Robbie Bach is still considered a genius. Was this a good use of cash? Nope - but it did make their share buybacks seem not so bad.

When I look at MSFT - the poster child of share repurchase programs - I don’t see how investors find it so easy to agree with the notion that buybacks are the best use of corporate cash. Just look at the competition - Google, Apple and Nintendo - and try to figure out how much they have spent since 2002 with buybacks. Seems to me they found the best use of cash had more to do with helping them to make innovative products that consumers want.