Technology

What the $6 Billion Facebook Stock Buyback Means for You

By Diane Alter, Contributing Writer, Money Morning • November 21, 2016

Facebook Inc. (Nasdaq: FB) officials just announced a $6 billion Facebook stock buyback. It's the first share repurchase program since the company went public in 2012.

Before we get into how the Facebook stock buyback impacts investors, here are the key details of the social media giant's first-ever share repurchase program...

A Closer Look at the Facebook Stock Buyback

Facebook announced the $6 billion stock buyback late Friday.

The buyback of Facebook Class A shares is authorized to start in Q1 2017 and does not have an expiration date. In a regulatory filing, Facebook said buybacks will depend on factors including price and market conditions. The buybacks may also include open market or privately negotiated transactions.

The buyback is for FB Class A shares only.

Facebook has three classes of stock. Class A shares trade under the ticker "FB" and are allotted one vote per share. Class B shares have 10 votes per share and are held by insiders. Class C shares, presented in April and approved in June, allow investors to own FB stock but have no voting rights.

Don't Miss: Get the Best Investing Research Today to Grow Your Money

Facebook is planning to give two "Class C" shares for every Class A and Class B. This effectively makes it a 3-for-1 Facebook stock split.

The creation of the new class of non-voting shares (Class C) is aimed at allowing CEO Mark Zuckerberg to give away his wealth without surrendering control of the social media goliath he founded. Zuckerberg has pledged to give away 99% of his Facebook shares via the Chan Zuckerberg Initiative.

To date, Facebook has not given an update of the Facebook stock split.

As for the Facebook stock buyback, the company has plenty of cash to fund the hefty $6 billion share repurchase program. The company's balance sheet boasts about $26 billion in cash and marketable securities.

Companies engage in stock buybacks for several reasons. Here's what the FB stock buyback means for investors...

What the FB Stock Buyback Means for Investors

[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]

Buybacks represent an opportunity for a company to return value to shareholders.

Buybacks reduce assets on a company's balance sheet and increase their return on assets. By reducing the number of outstanding shares and maintaining the same level of profitability, earnings per share will increase. Shareholders now have a higher percent of ownership and a higher price per share.
Buybacks are often implemented when a company believes its shares are undervalued. Facebook shares have fallen almost 10% since its strong Nov. 2 third-quarter earnings report. Still, the Facebook stock price is up about 12% year to date.
Buybacks provide a tax advantage. When excess cash is used to repurchase company stock instead of increasing (or initiating) dividend payments, shareholders can defer capital gains if share prices increase.
For tech goliaths like FB, buybacks allow a company a way to return cash to shareholders since they typically prefer to spend their cash on growth opportunities. FB said in its Q3 2016 earnings release that it plans to spend more on data centers and hiring engineers.

Facebooks shares jumped 1.44% to $118.71 today (Monday). It was investors' first chance to applaud the FB stock buyback news.

Money Morning is bullish on Facebook stock. We see FB shares going higher.

In fact, Money Morning Director of Tech & Venture Capital Research Michael A. Robinson sees the FB stock price at $250 by 2020. Here's what will take the FB stock price there...

Editor's Note: Timing is everything when it comes to making money in markets - and this new, free service we created puts timing on your side...

Follow us on Twitter @moneymorning and like us on Facebook.

Related Articles:

Business Insider: Facebook Has a New Class Structure and Mark Zuckerberg Is Still in Control
CNN: Facebook Approves $6 Billion Stock Buyback
TechCrunch: Facebook Authorizes a $6B Stock Buyback