Buybacks do not increase S&P 500 Index earnings-per-share (EPS), the Dow is a different story. On an issue level, share count reduction (SCR) increases EPS, therefore reducing the P/E and making stocks appear more ‘attractive’.
SCR is typically accomplished via buybacks, with the vital statistic being not just how many shares you buy, but how many shares you issue. In the most recent Q4 2013 period we saw companies spend 30.5% more than they spent in Q4 2012, though they purchased about the same number of shares. The reason is (in case you didn’t notice), that prices have gone up, with the S&P 500 up 29.6% in 2013, and the average Q4 2013 price up 24.7% over Q4 2012.
Many companies, however, appear to have issued fewer sharers, and as a result have reduced their common share count. The result is that on an issue level it is not difficult to find issues with higher EPS growth than net income (USD) growth. A quick search found that over 100 issues in the S&P 500 had EPS growth for 2013, which was at least 15% higher than the aggregate net income.
The result for those issues, were higher EPS and a lower P/E. On an index level, however, the situation is different. The S&P index weighting methodology adjusts for shares, so buybacks are reflected in the calculations. Specifically, the index reweights for major share changes on an event-driven basis, and each quarter, regardless of the change amount, it reweights the entire index membership. The actual index EPS calculation determines the index earnings for each issue in USD, based on the specific issues’ index shares, index float, and EPS. The calculation negates most of the share count change, and reduces the impact on EPS.
The situation, however, is the opposite for the Dow Jones Industrial 30. The Dow methodology uses per share data items. So if a company reduces its shares, with the impact being a 10% increase in earnings (as an example) with a corresponding 5% increase in net income, the Dow’s EPS will show the increase in EPS.
Again, the impact would be mostly negated in the S&P 500. This is not to say that buybacks don’t impact stock performance, and therefore the stock level of the indices (and price is in P/E). It is only to say that the direct impact on the S&P 500 EPS is limited, even as examples on an issue level are becoming easier to find.
This article was written byHoward Silverblatt, Senior Index Analyst, S&P Dow Jones Indices.
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