Quantitative earnings enhancement from share buybacks

TL;DR

This paper analyzes how share buybacks mechanically influence earnings per share by balancing reduced share count against decreased net earnings, providing a quantitative assessment of their impact on earnings growth.

Contribution

It introduces a quantitative framework to measure the earnings enhancement from share buybacks and compares natural growth with buyback-influenced growth.

Findings

Share buybacks can significantly increase EPS through share reduction.

The net effect on earnings depends on the buyback price and company's earnings.

Case studies illustrate the varying impact of buybacks in the US stock market.

Abstract

This paper aims to explore the mechanical effect of a company's share repurchase on earnings per share (EPS). In particular, while a share repurchase scheme will reduce the overall number of shares, suggesting that the EPS may increase, clearly the expenditure will reduce the net earnings of a company, introducing a trade-off between these competing effects. We first of all review accretive share repurchases, then characterise the increase in EPS as a function of price paid by the company. Subsequently, we analyse and quantify the estimated difference in earnings growth between a company's natural growth in the absence of buyback scheme to that with its earnings altered as a result of the buybacks. We conclude with an examination of the effect of share repurchases in two cases studies in the US stock-market.