How important have buybacks been to EPS growth in the S&P 500 stocks over the past 3 years?
First, let’s look at sales growth in that period. According to Bloomberg, sales have grown about 14% over the past 3 years for the S&P 500 index:
Over the same period, earnings for the index have grown about 25%, as shown by the 3 year chart:
(Meanwhile, the S&P 500 index has appreciated about 55%, as multiple expansion has been a bigger driver than earnings growth for the move higher in stocks).
In other words, EPS growth has outpaced sales growth by about 11% during the past 3 years. How much of that further growth in earnings due to higher profit margins vs. other factors?
Here is the chart of S&P 500 index profit margins, courtesy of Dr. Ed Yardeni:
Profit margins have been relatively flat over the past 3 years, increasing about 0.5% in that period. That 0.5% increase in margins would lead to a 5% incremental increase in earnings based on sales per share in the S&P 500 around 1120 at the moment. The other 5-6% increase in EPS over the past 3 years is due to buybacks and other factors (like lower taxes).
In sum, buybacks have likely contributed about 5% of the 25% growth in Earnings Per Share in the S&P 500 index over the past 5 years, or about 20% of the total growth in EPS.
That’s significant because the pace of buybacks looks likely to slow based on the decline in buyback authorizations over the past couple of quarters. Bloomberg had that story last week, with the following chart to illustrate:
Buybacks have been a major source of demand over the past 2 years, so it’s worth watching whether authorizations pick back up in the fall or completed buybacks fall announcements lower.