Monday, July 09, 2007

Stock Buybacks Distort Earnings Per Share Growth

In this market advance one fact analyst can agree on is the level of stock buybacks has been large. Just today, Johnson & Johnson (JNJ) approved a $10 billion stock buyback. ConocoPhillips (COP) announced a $15 billion stock buyback.

In the case of JNJ, the $10 billion dollar buyback would represent about 5.5% of the company's outstanding shares at today's closing price of $62.72. JNJ has 2.87 billion shares outstanding. If the buyback were completed today, the share count would reduce to approximately 2.71 billion shares. Analysts' earnings per share estimate for year end 2007 is $4.04. This equates to a net income figure of about $11.59 billion dollars. The EPS figure on the lower share count would equal $4.28; thus boosting EPS growth by nearly 6% while actual net earnings remain unchanged.

In an environment where buyback activity is high, an investor must look at the company's growth in revenue, earnings, etc., before converting to a per share basis. This will provide an investor insight into the true growth rate of a company. It is estimated for 2007 that almost one half of the growth in S&P 500 earnings per share will result from share buybacks.

Certainly this buyback activity has contributed to the bull market advance. The reduced number of shares available in the market for investors to purchase is contributing to the upward trend in the market. If the supply is lowered and demand remains the same, prices will move higher.

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