As social-media giant Facebook (NASDAQ:FB) points out in its most recent quarterly SEC filing, the company announced a $6 billion share repurchase program in November 2016. Facebook extended that authorization by $9 billion back in April, according to the filing.
The company also said that as of Sept. 30, it had only $3.54 billion with which it could repurchase stock, good for less than 1% of the company's current market capitalization of about $390 billion.
It's not entirely unexpected, then, that the company announced a $9 billion addition to that share repurchase program after the market closed on Dec. 7.
While it's probably better than nothing, especially since the company's stock price has declined significantly in recent months, it's simply not enough to really make a difference. Here's why.
What's $9 billion for a social-media giant?
It's true that $9 billion is a lot of money, but what matters when evaluating the size of a share repurchase authorization isn't the absolute value of the buyback but the size of that buyback compared to the company's total market value, or market capitalization. Share repurchases, when done right, are supposed to meaningfully take down the number of shares a company has outstanding, serving to boost a company's earnings per share for a certain level of net income.
If a buyback can reduce a company's share count significantly, then investors should cheer. If it's just a drop in the bucket, then that buyback is probably more valuable in terms of optics than of actual value creation. The $9 billion addition to the company's share repurchase authorization has the markings of the latter type.
If Facebook manages to execute that $9 billion repurchase program while also exhausting the $3.54 billion it had available at the end of the quarter, then all of that repurchase activity is merely good for about 3% of the company's current shares outstanding, given a $390 billion market cap.
That's simply not going to move the needle.
Moreover, while Facebook has been buying back shares at a rapid clip over the past three quarters relative to the amount that it had authorized on the program, buying back almost $9.4 billion worth of shares over the past three quarters, there's no guarantee that this newly authorized program will be completed at a similarly rapid clip. Although if Facebook wants to signal to investors that it believes the current share price is too low, buying back the shares as quickly as practicable does look like the right move.
How Facebook could go further
If Facebook wants to send a signal to investors that it's really serious about giving back to shareholders, it might make sense for the company to put out a longer-term capital allocation strategy for investors to chew on. For example, the company could commit to giving back, say, about 50% of its annual free cash flow to shareholders in the form of share repurchases. That'd make its share repurchase programs feel more like part of a long-term strategy to share the company's considerable success with its shareholders, rather than a short-term tactical move to try to bolster investor confidence in the face of a declining stock price.
The company could further try to entice investors to buy into the stock, or stick with it, by announcing a regular dividend. The company generates so much free cash flow and is so well positioned in its market that paying a dividend would put cash into shareholders' pockets while not constraining the company's ability to make the investments it wants to make for the long term.