In response to your question, I recall seeing that circular dial stamp before (but can't recall where). Upon further research the use of that phrase either handwritten or by rubber stamp is written into Postal Manuals back in that day and up through the 1940s.
Here's how the PL&R read in 1887 (note second paragraph):

However, it's often found as a straight line stamp such as in this example:

It's also mentioned at this link:
http://www.postalmuseum.si.edu/muse...eralbum.htmlThe "Returned for Better Direction" phrase is used quite extensively in Canada, too.