Facebook Has Better Uses for Its Cash Than Stock Buybacks

(Bloomberg Opinion) -- Can you think of ways Facebook might spend $9 billion of its cash?

If I were making a short list, 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 cybersecurity 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. Facebook could spend even more on policy wonks to shape and prepare for more heavy-handed regulation of tech companies. I could go on.

To be clear, Facebook is already spending billions of dollars on these important 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 $9 billion in additional spending to buy back stock from investors. It was the second authorization of that size this year, and the company bought more than $10 billion 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 last 12 months the company has already spent $10.4 billion — the equivalent of 35 percent 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 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.” Facebook shares rose 3.2 percent on Monday, the first trading day after Facebook’s disclosure of its increased stock repurchase authorization.

Still, the share repurchases are a significant chunk of change. For $10.4 billion, Facebook could give away one of its new Portal video chat gadgets to about one-fifth of the U.S. population. The cash spent on share purchases in the last 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. It is a lot of money. 

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 to employees, to executives of companies that Facebook acquires and others. It is true that Facebook’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 buybacks are a big reason for that.

The classic argument in favor 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 make shareholders happy. 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 from a company with many question marks around its financial prospects. It has much better ways to put its considerable cash to good use. 

In terms of the number of shares rather than the value, Facebook bought back 54 million Class A shares through the first nine months of 2018. For all of 2017, the company repurchased about 13 million shares.

This figure is 69.4 million Portal devices at the currently discounted price of $149.

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shira Ovide is a Bloomberg Opinion columnist covering technology. She previously was a reporter for the Wall Street Journal.

©2018 Bloomberg L.P.