It’s Time for Facebook, Inc. to Up Its Buyback Game

Facebook shares - It’s Time for Facebook, Inc. to Up Its Buyback Game

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Facebook, Inc. (NASDAQ:FB) CEO Mark Zuckerberg appeared before Congress last week to explain how so many of its users’ data got into the hands of Cambridge Analytica without the users’ consent. Naturally, Facebook shares have taken a big hit since the scandal first broke — though they’ve recovered slightly in the last week.

Personally, I think Zuckerberg did a good job testifying before Congress. He was honest, sincere and forthright. And yes, very nervous, but who wouldn’t be in that situation?

If Facebook and other social media companies are regulated in the future, I have no doubt whatsoever that Zuckerberg’s company will figure out how to be a major beneficiary of any changes.

In the end, advertisers aren’t going to abandon Facebook and Instagram, because the alternative isn’t nearly as attractive.

I believe Facebook will do whatever it takes to satisfy Congress and its users and move on.

But what about satisfying investors?

A Good Way to Restore Faith

Broadcom Inc (NASDAQ:AVGO) just announced a share repurchase program to buy back $12 billion of its stock. The buyback, in combination with its existing dividend, is intended to increase shareholder value after failing to takeover Qualcomm, Inc. (NASDAQ:QCOM). 

Broadcom Chief Financial Officer Tom Krause said in its news release:

“The initiation of a stock repurchase program enhances our capital allocation strategy and provides us with a complementary tool to deliver value to our shareholders. We are maintaining our policy of delivering 50% of trailing 12-month free cash flow to shareholders in the form of dividends while adding the ability to use the balance of our free cash flow not only for acquisitions but also for opportunistic buybacks.”

So, what does Facebook do on the capital allocation front?

Well, FB doesn’t pay any dividends. Never has. It also doesn’t have any debt — although it does have a $2 billion senior unsecured revolving credit facility that remains undrawn.

That leaves acquisitions, investing in its business, or buying back stock.

In November 2016, the company initiated a $6 billion repurchase program to buyback Facebook shares. In 2017, the company’s first full year buying back stock, it repurchased 13 million shares for $2.07 billion ($159.23 average price), exercising one-third of its share repurchase program. 

Facebook’s free cash flow in the past year was $17.5 billion. Over the last three years it’s spent less than $600 million acquiring other businesses. That leaves almost $15 billion to invest in its business.

It clearly didn’t do that as its cash and marketable securities increased by 42% in 2017 to $41.7 billion. 

Buybacks Sometimes Make Sense

I’m usually not a fan of buybacks because companies generally pay too much for their stock.

Facebook shares in 2017 traded between a high of $183.73 and a low of $115.51 for a midpoint of $149.62. It paid 6.5% higher than its midpoint to buy back its stock.

Generally, you want to be below the midpoint.

So, far in 2018, Facebook shares have traded between a low of $150.75 and a high of $195.32, a midpoint of $173.04.

With $4 billion left on its share repurchase program and trading below its midpoint despite the post-Congress rally, Facebook has plenty of money in the bank, lots of free cash flow and no reason not to up its buyback game. 

As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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