Without buybacks, there is no earnings per share growth

Stock buybacks are drawing a lot of heat lately, but it appears they’re the only thing keeping big companies earnings afloat.

According to a chart from Deutsche Bank, as sales and profit growth have retreated, companies’ consistent purchases of their own shares have prevented earnings per share (EPS) growth from going negative.

“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,” said the note from DB Strategist David Bianco. He also noted that EPS will likely end flat for the year, and based on the chart, that’s in large part due to buybacks.

All of this has helped mask what’s been dubbed an earnings recession. The buybacks have helped keep reported earnings per share from looking too dismal.

Basically, earnings per share is earnings divided by the number of shares outstanding. So as a company’s earnings decrease, management is able to lessen the blow on a per share basis by reducing the share count through buybacks. So as revenue and earnings deteriorate, the buybacks bolster the EPS.

This can be a way to return value to shareholders by driving up the EPS, but it has become more prevalent in recent years with announced buybacks increasing by 50% this year alone.

The increased buyback activity has been called into question by some investors and politicians, saying it is a financial tool to cover up what’s really happening to earnings. One US Senator even called for the SEC to investigate buyback practices on Monday.

Regardless of their effectiveness, they seem to be keeping the S&P from looking too dismal.

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