Buybacks and Earnings Per Share
Buybacks lift earnings per share even when total profit does not change. That can make growth look better than it is. Here is the math, the effect of stock-based pay and how to see through it.
The math
Earnings per share (EPS) is net income divided by shares outstanding. Shrink the share count and EPS rises, even if the business earns exactly the same amount.
| Before buyback | After buying back 5% | |
|---|---|---|
| Net income | $1,000M | $1,000M |
| Shares outstanding | 500M | 475M |
| Earnings per share | $2.00 | $2.11 |
Same profit, fewer shares: EPS rises about 5.3%.
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