Facebook has better uses for spare cash than buying back shares
Can you think of ways Facebook might spend $9 billion of its cash? If I were making a shortlist, I would put on it hiring more moderators to do the terrible, laborious work of actively sniffing out hoaxes, election-related tampering and calls to violence on Facebook, WhatsApp, Instagram and other Facebook-owned hangouts. It might not hurt to increase investment on cyber security to do more to prevent foreign governments from using Facebook as a tool for propaganda or to prevent thieves from taking advantage of Facebook software loopholes to compromise accounts of tens of millions of people. The company could spend more on policy wonks to shape and prepare for more heavy-handed regulation of tech companies.
To be clear, Facebook is already spending billions of dollars on these priorities, along with many other things as it grows more expensive to be Facebook. On Friday, though, the company said its board had also approved up to $9bn in additional spending to buy back stock from investors. It was the second authorisation of that size this year, and the company bought more than $10bn in shares through the first nine months of 2018.
Share repurchases are an often useful and necessary fact of life for public companies. Facebook and many other companies buy back shares for all sorts of reasons, including to counter the effect of issuing new stock to employees and others.
But Facebook’s stock repurchase activity deserves an extra dose of scrutiny in light of the company’s extensive and expensive to-do list. And it’s also not great if Facebook is trying to send a message of confidence to investors through increased share buybacks – a tactic more often employed by musty companies that have lost stock buyers’ faith.
To put Facebook’s stock purchase in perspective, in the past year the company has already spent $10.4bn – the equivalent of 35 per cent of cash generated by its business operations during that period – on repurchasing its stock from existing shareholders. It’s not clear how much Facebook spent in that period on nobler missions that include weeding out harmful content and securing people’s digital information, but that spending is most likely in the billions of dollars at least.
Some Facebook watchers are sanguine about the company’s plans to increase its spending on stock repurchases. Analysts at Deutsche Bank told investors that the decision was smart and a “positive endorsement from the management team and the board.” The company shares rose 3.2 per cent on Monday, the first trading day after the disclosure of its increased stock repurchase authorisation.
Still, the share repurchases are a significant chunk of change. The cash spent on share purchases in the past 12 months is close to what Facebook has doled out on building and maintaining its global network of computing networks, real estate and other physical assets.
The company announced in late 2016 that it was going to start repurchasing its stock and executives said at the time that its stockpile of cash and financial performance allowed the company to buy back stock from investors “from time to time to help offset the dilution” of minting new stock issued.
It is true that the company’s share count has barely increased from the beginning of 2017 despite a huge jump in hiring and stock pay for those new employees over that period, and no doubt the share buy-backs are a big reason for that.
The classic argument in favour of stock repurchases is they funnel cash to stockholders to put that money to work in productive ways. And it’s typically seen as a sign of confidence from a company that its finances are so rock solid that it can afford to hand cash back to shareholders. For Facebook, though, trying to send a signal of confidence feels forced. And share repurchases are a way that stressed companies can give their bottom lines a lift solely by reducing the denominator in the “per share” part of the earnings-per-share equation.
I don’t think financial engineering is at work here. But far from being a vote of confidence, Facebook’s increased share repurchases feel like a forced smile. It has much better ways to put its considerable cash to good use.
Facebook’s stock repurchase deserves an extra dose of scrutiny in light of the company’s extensive to-do list