Social media conglomerate Meta Platforms (META -1.52%) spends more money on share repurchases than many companies, but few people seem to pay much attention to it. The company's struggles in its advertising business post-iOS privacy changes have clouded sentiment for Meta, but all of this noise could eventually prove beneficial to shareholders.
You need to know about Meta's massive share repurchase plan and how it could benefit investors.
What do share repurchases mean for you?
Companies can share profits with shareholders in two primary ways. They can pay a cash dividend to shareholders, directly sharing profits with them, or they can use share repurchases, buying their stock from the market.
Share repurchases reduce the number of outstanding shares. Fewer outstanding shares means each remaining share is more valuable because there are fewer shares to spread the company's profits across.
You can see below what Meta's repurchases have looked like over the past five years; management has been aggressive over the past two years. Outstanding shares have fallen almost 7% during the past five years.
Demonstrating the impact of repurchases is simple; Meta's net income was $15.92 billion in 2017, and there were approximately 2.956 billion shares outstanding, resulting in earnings per share (EPS) of $5.39.
Meta's net income over the past 12 months is $37.34 billion, and there are 2.7 billion shares outstanding, resulting in an EPS of $13.83.
The company's total net income grew by 134%, but EPS grew by 156%. In other words, Meta is turbocharging its EPS growth as it repurchases more of its stock. This might not seem like much, but companies that consistently generate cash can repurchase shares for many years -- it adds up over time.
Why Meta's repurchases are so effective
Meta is repurchasing shares on the open market, so it pays market price just like you or me. But Meta's not buying shares to sell them later; it retires the shares, taking them out of circulation.
It helps investors when Meta gets more bang for its buck. A lower share price means that repurchases buy more shares, which helps EPS grow more.
Armed with that perspective, you can see why Meta's management has gotten so aggressive at repurchasing stock. Meta's price-to-earnings (P/E) ratio has fallen to just 12, less than the historical average of the S&P 500.
Meta is struggling with less effective ads due Apple's iPhone privacy changes. However, the company is still getting $0.33 of free cash flow from every revenue dollar, and analysts still believe Meta will grow EPS by an average of 11% annually over the next three to five years.
Looking at what Meta has planned
So, where to go from here? Meta's dark clouds let the company get excellent value from its share repurchases. The company bought back another $5 billion worth of shares in the second quarter and has another $24 billion remaining on its authorized plan.
Considering that Meta's market cap is $445 billion, another 5% of shares will disappear over the coming quarters if the share price remains stable.
Meta is working through the challenges posed by Apple's iOS changes, and Reality Labs is poised to remain unprofitable for the foreseeable future. But if you believe in Mark Zuckerberg's leadership at the helm and that Meta will figure things out over the long run, these share repurchases will look like a gift to shareholders in hindsight.