Explaining Earnings Per Share Growth

Abstract

The authors examine the fundamental factors that determine earnings growth, including the role of share repurchase, and offer a simple method of calculating the expected long-term growth rate of earnings per share. Many factors can affect the sequence of earnings, and the ability to formulate earnings growth models helps analysts isolate the direct factors that are likely to impact future earnings and earnings growth. If the forecast of the growth rate of earnings per share with share repurchase is 0.15 and without share repurchase is 0.10, the analyst knows that 0.05 of the 0.15 growth rate results from the share repurchase. The actual growth rate may, in fact, be different, in which case the analyst can recomputed the actual growth rates with and without the share repurchase.