Facebook and Google Love Stock Buybacks
They generate huge amounts of free cash flow and use the most of this to reduce their share counts — to great effect on their stock prices.
Not too many people realize that both Google (GOOG, GOOGL) and Facebook (FB) make some of the largest stock buyers in the market. They both have massive share repurchase programs that influence their stock prices.
I chose both of these companies since they both make most of their revenue in advertising. And they both generate huge amounts of free cash flow (FCF). FCF is what pays for the huge stock buybacks at these companies.
Thinking About Free Cash Flow
Free cash flow is one of my favorite themes in analyzing stocks. It refers to the cash earnings of a company after all major expenditures, including every cash expense on the income statement, plus some other items.
Those other FCF items include major expenditures that are not on the income statement, like capital expenditures (buying furniture, capital plant equipment, or paying for software development expenses in some cases). FCF also includes changes in working capital — i.e., how much payables increase or not, or receivables increase, etc.
In the end, FCF covers every major cash cost of a business. It leaves a company “free” to do things like pay dividends (which neither Google nor Facebook does), pay down debt principal amounts, or, as we highlight here, repurchase their own shares.
Share Buybacks Have Been Growing
The chart above shows that in the past 2 years, Facebook has been dramatically increasing its buybacks. This chart is on a TTM (trailing 12 months) basis so that it can show the trends over the past year, each quarter.
You can see in the red column that Facebook’s share repurchases have risen from $8.7 in its trailing 12 months two years ago to a 122% higher rate of $19.2 billion for the 12 months ending June 30, 2021. In other words, its buybacks have more than doubled, and grown at a compound rate of 49% each year.
Moreover, buybacks as a proportion of FCF have also risen. In Q3 2020 they took up 44.3% of the $19.5 billion in FCF. By the end of Q2 2021, buybacks accounted for 59.8% of the FCF that Facebook generated. In other words, the majority of its FCF was used to lower its share count.
The same thing has happened at Google. Look at the chart below.
Here you can see that Google raised its buybacks from $15 billion 2 years ago to $40 billion in the last 12 months ending June 30. That represents a gain of 167.5% — almost triple the amount 2 years ago. In other words, Google’s buybacks have more than doubled and a half and grown at a compound rate of 63.6% each year.
Buybacks as a proportion of Google’s FCF have also climbed. Two years ago share repurchases represented 52.4% of its FCF. Now, in the last 12 months, buybacks take up over two-thirds (68.3%) of Google’s FCF.
Moreover, you can see that the coronavirus had virtually no effect on these two companies’ FCF growth rates and their buyback programs. Both are in full swing.
The Net Effect On Share Counts
In the past 2 years, Google has spent $67.1 billion on share buybacks. Today its market cap is $1,882 billion. So that means it has spent about 3.6% of its market value on buybacks. The number is not exact, since the market cap has been rising over 62% over this period.
This is borne out in the share count reduction. For example, two years ago there were 694.1 billion shares outstanding, according to Seeking Alpha. But today, as of the end of June 30, 2021, there were 26.5 billion fewer shares outstanding at 667.6 billion. That represents a decrease of 3.82% of its share over that 2 year period.
The same happened at Facebook. It has spent $26.9 billion in the last 2 years on buybacks. That represents about 2.5% of its existing $1,082 billion market value. Moreover, its share count was 28 million higher at 2,854 billion vs. 2,826 billion today. That works out to a 1.0% share reduction over 2 years.
Keep in mind that these reductions in share count are after all the options and restricted shares are included. That is why the buyback yield is higher than the share reduction. Both of these companies issue large amounts of both to enhance their hiring practices. So the buybacks have both a sterilization effect and a reduction effect on the share count. That latter is good for shareholders.
Why Buybacks Help a Non-Dividend Paying Company
The primary real effect of buybacks for companies that pay dividends is to increase their dividends per share over time. In other words, for the same amount of dividends paid by the company, it can raise the per-share amount with lower share counts. It is also clear that share buybacks are a more efficient payment to shareholders, after all taxes are paid, especially for companies that pay dividends.
But the same effect occurs with earnings per share (EPS). With lower share counts, the higher the EPS. Therefore, at the same price-to-EPS ratio (P/E), the stock will rise.
Another major effect is to push a stock higher. This comes from the additional buying pressure.
Lastly, a major effect comes from increasing the remaining (non-selling) shareholders’ stakes in the company. Therefore, if there ever is a dividend paid or a spin-out or spin-off company issued, those shareholders get larger than otherwise piece of the total payment.
Bottom Line: expect both Facebook and Google to continue their buybacks over time. They believe the shares bought back will have a huge long-term effect on the company’s future earnings and stock price.
My best guess is that over a 10 year period it could account for anywhere from 5% to 20% gain in their stock prices. For example, take Google. It cut its shares by 3.8% over 2 years. So, on a compounded basis over 10 years, that works out to a 20.6% reduction, assuming this pace continues. Facebook cut its shares by 1.0% over 2 years. So over 10 years, that works out to a 5.1% reduction effect. If Facebook picks up its buyback payments as a percent of its growing FCF, that could be even higher.