How Much Of S&P Earnings Growth Comes From Buybacks

Tyler Durden's picture

Having pounded the table on buybacks as the only marginal source of stock purchasing since some time in 2013, we were delighted one month ago when Bloomberg finally got it, writing an article titled "There's Only One Buyer Keeping S&P 500's Bull Market Alive." The answer: corporate stock repurchases of course.

This is what it found:

Demand for U.S. shares among companies and individuals is diverging at a rate that may be without precedent, another sign of how crucial buybacks are in propping up the bull market as it enters its eighth year. Standard & Poor’s 500 Index constituents are poised to repurchase as much as $165 billion of stock this quarter, approaching a record reached in 2007. The buying contrasts with rampant selling by clients of mutual and exchange-traded funds, who after pulling $40 billion since January are on pace for one of the biggest quarterly withdrawals ever.


“Anytime when you’re relying solely on one thing to happen to keep the market going is a dangerous situation,” said Andrew Hopkins, director of equity research at Wilmington Trust Co., which oversees about $70 billion. “Over time, you come to the realization, ‘Look, these companies can’t grow. Borrowing money to buy back stocks is going to come to an end.”’

But, when you have the ECB backstopping purchases of corporate bonds, giving companies a green light to issue debt at will and use the proceeds to buyback even more stock, it won't end just yet.

However, now that it is common knowledge that over the past several years the market has been conducting the most elaborate acrobatic example of pulling itself up by its bootstraps, by conducting a slow motion LBO in which just over 1% of the S&P has been purchased with incremental leverage, another question which bears answer is how much of S&P EPS growth comes from buybacks?

This is important because with Q1 earnings season starting and expected to post the worst, -8.5% drop in EPS since the financial crisis, and one in which collapsing energy and financial will be routinely ignored, we asked what would happen to "earnings" if one also excluded the benefit from buybacks.

Here is the answer courtesy of Deutsche Bank:

About 25% of S&P 500 EPS growth comes from buybacks on average since 2012. The S&P 500 companies on aggregate pay out 2/3 of their earnings through dividends & buybacks.



Buybacks are an important part of the earnings payout and a significant driver of total shareholder return and EPS growth in a slow sales world. However, the complexities in correctly measuring buyback payout ratios, buyback yields and buyback flows cause investor confusion. Just as option expense shouldn’t be excluded from EPS or from any FCF measures used for valuation, it should not be neglected in net buyback activity measures. Buyback yield estimates should reflect the continuous issuance of stock to employees at option exercise prices that are well below the market price at which shares are repurchased. This is why we estimate buyback yield as: (net dollars spent on buybacks less option expense) / market cap. This is because although companies report net dollars spent on buybacks, they spend more per share repurchased than what they receive per share issued.

In other words, since the financial world now openly excludes everything it does not agree with, if one were to exclude the contribution of buybacks to Q1 earnings, the S&P would be down not 8.5% but double digits. And, more troubling, if excluding energy and buybacks, then Q1 EPS would be not only negative (7 of 10 sectors are projected to decline in Q1, so energy and 6 others), but even more negative. We expect this to be addressed by the mainstream media some time in 2018.

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Rehab Willie's picture

The end is nigh

'Demonic' arches rising in New York and London on April 19: 'Welcome signs' for the Antichrist?

Libertati Aut Ad Mortem's picture
Libertati Aut Ad Mortem (not verified) Rehab Willie Apr 6, 2016 7:29 PM

Forget not,

The power of the serpent of Egypt was broken on the Christian cross
lasvegaspersona's picture

It's all GAAP's fault!!

Get rid of 'accounting standards' and we'll show you some 'real' earnings numbers.

Lets_Eat_Ben's picture

Buybacks - it's kinda like masturbating rather than trying to appeal to women

TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) Lets_Eat_Ben Apr 6, 2016 3:11 PM

Or like sleeping with a hot tranny.  You can always brag about your conquest unless your friends realize it was a tranny...

TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) Apr 6, 2016 3:08 PM

I think we all get now what is keeping the party fueled, the key question is:  What is going to stop the party?  I don't really see any catalyst for change right now.  Governments keep kicking the can, investors (or Central Banks) keep funding the governments to kick the can and the party keeps going.  Sure it doesn't make any sense but it really doesn't need to until everyone needs to face reality.  I just don't see anything reality check coming up anytime soon.

buzzsaw99's picture

hey even the squid is doing it so it must be a good idea.

GoldenGoosed's picture

Until credit and derivatives explode! Or currencies can't be managed..... Or the nukes come out gov dick asses!
But your right as they would call it something to rally upon!

minitrue's picture
minitrue (not verified) Apr 6, 2016 3:23 PM

CEO's can spend money on CAPEX and if they fail, they lose their job or they can spend money on buyback and get big fat bonuses along with stock options.

Seems like a easy choice.

TheRideNeverEnds's picture

Sure if buybacks stopped the 'market' would be in trouble but guess what; if ifs and buts were candy and nuts we'd all have a merry fucking christmas.



If you could borrow money that someone else has to pay back and use it to pay yourself you would do it all damn day long.  Why shouldnt the boards of these companies?  So what if the company collapses, not their fucking problem.  They will be just fine. 



The banks are buying secutities, the companies are buying securities so you too should be buying securities.  If this thing ever starts going in the other direction its not like any money you 'saved' by not being long everything would be worth anything anyway.

SomethingSomethingDarkSide's picture


Quarterly results are the real activist investors in every boardroom

augustusgloop's picture

'slow motion lbo' - best description of the market this year-you made my week, tylers. 

Tetres's picture

LOOK at MCD......deterioating balance sheet, earnings stink for 3-yrs now, but up due to stock buy backs 

xerxiesx's picture

breakfast all day!  30 P/E sounds about right to me now. </sarc>

bada boom's picture

Here's a real question,

What if corporations as a whole are able to continue buybacks for another couple of years so that number is closer to 40% of the earnings growth.

And lets say, the Fed BS continues with ramping and/or maintaining stock prices.

What happens if a real recovery starts. Do investors come in and buy the stock re-issues to the public at higher levels than we have today?

Is that the plan / scam?

The Real Tony's picture

Share buybacks = Chapter 11 bankruptcy. Paying quad or a 400 percent premium over and above fair market value of what the stock market indexes should be is a one-way trip to bankruptcy.

yogibear's picture

Maybe William Dudley can start proposing the Federal Reserve directly gives companies money at 0%. Like direct financial heroin.

Fed currently buying the stock indexes. One big game to these academics.

The Federal Reserve is buying up everything else with printed dollars.

Ink Pusher's picture

Q. " how much of S&P EPS growth comes from buybacks?"

A. There's no way to "really" tell because from all indications it seems to be stuck in a perfectly structured perpetual loop.

Ink Pusher's picture

You can quote me :Derivatives markets are the true physical manifestation of dark forces at work."