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A PR I L 2016
Exhibit 1
5
0
5
10
4
Share-repurchase
4
intensity,3
1 Based on sample set of more than 250 nonnancial S&P 500 companies.
2 Effect of share repurchases on TRS is measured by residuals of multivariate regression. Variables are share-repurchase intensity and
economic-prot growth. Economic-prot growth is a measure that combines earnings growth and return on capital (relative to cost of
capital). This regression shows effect of share-repurchase intensity is not statistically signicant.
3 Difference between EPS growth and net income growth used as proxy for degree of share-repurchase intensity.
Source: Analysis of data provided by McKinsey Corporate Performance Analytics, a McKinsey Solution
Misguided math
Companies that repurchase shares when prices are
low can create value for those shareholders who
dont sell if the share price rises as a result. As our
prior research has found, however, most companies dont time these purchases well.1 Rather, we
find that many executives have come to believe
that share repurchases create value just by
increasing EPS. The logic seems to be that earnings
across a smaller number of shares mathematically
increases EPS, and if EPS increases and the
price-to-earnings (P/E) ratio stays constant, then
a companys share price must increase.
The empirical evidence disproves this. For while
there appears to be a correlation between TRS and
EPS growth, little of that is due to share repurchases. Much of it can be attributed to revenue and
total earnings growthand especially to return
on invested capital (ROIC), which determines how
much cash flow a company generates for a given
dollar of income. All else being equal, a company
with higher ROIC will generate more cash flow
than a similar company with lower ROIC. But without the contribution of growth and ROIC to
TRS, there is no relationship between TRS and
the intensity of a companys share repurchases
(Exhibit 1).2
MoF 2016
Earnings per share (EPS)
Exhibit 2 of 4
Exhibit 2
Earnings per
share (EPS)
Base year
Repurchase shares
Dividends
Net income
100.0
100.0
100.0
Number of shares
100.0
93.8
100.0
1.00
1.07
1.00
15
15
15
1,500
1,500
100
100
1,600
1,600
16.00
15.00
0.00
1.00
16.00
16.00
EPS
Total company
valuation
P/E
Equity value
Dividends
Share repurchases
Per-share
valuation
Exhibit 3
A higher EPS from repurchases is offset by the lower risk from repaying debt.
Share repurchases vs paying down debt
Base year
Earnings per
share (EPS)
100.0
100.0
(6.0)
(6.0)
(3.0)
Net income
94.0
94.0
97.0
100.0
92.9
100.0
0.94
1.01
0.97
15
15
15
Enterprise value
1,500
1,500
1,500
Debt
(200)
(200)
(100)
Equity
1,300
1,300
1,400
100
1,400
1,400
14.00
14.00
0.00
0.00
14.00
14.00
13.8
14.4
EPS
Dividends
Share repurchases
Equity value plus distributions
Per-share
valuation
100.0
Number of shares
Total company
valuation
Repurchase shares
13.00
13.8
Exhibit 4
Investing at an attractive return will always create more value than repurchasing shares,
but it may take longer.
Share repurchases vs investment
Earnings per
share (EPS)
Base year
Repurchase shares
Invest
Net income
100.0
100.0
115.0
Number of shares
100.0
92.9
100.0
1.00
1.08
1.15
15
15
15
1,500
1,500
1,725
1,500
1,500
1,725
100
1,600
1,725
15.0
15.0
15.0
15.00
16.16
17.25
EPS
Total company
valuation
Per-share
valuation
P/E
Value per share