Stock buybacks have surged this year.
Some market watchers, like Wall Street legend Art Cashin, argue that buybacks were responsible for the market making new highs.
That’s an opinion not shared by RBC Capital Market’s Jonathan Golub.
Here’s Golub, writing in a note to clients Tuesday:
“Many investors have raised concerns that buybacks are an outsized driver of EPS. We disagree. Since 2012, buybacks have contributed 25% of EPS. While repurchases make up a disproportionately large percentage of 2015 expected EPS, this is the result of lower Energy sector profits, not a shift in the underlying trend.”
By reducing the number of their shares on the market, companies beef up their stock’s price, which they believe to be undervalued. And fewer shares translates to a lower denominator in measuring earnings per share, which is calculated as profits divided by the average number of outstanding shares.
Golub notes, via this chart, that earnings growth has actually held its own. That’s excluding the drawback from energy stocks, whose profits have been hurt by the oil crash. And, the contribution from buybacks hasn’t jumped as much as some investors believe.