impact of share buybacks on EPS
When a company buys back its own shares, it increases
its earnings per share (EPS) when its reverse P/E is higher than the after-tax
interest rate on its debt (or investments). This is EPS accretion. Otherwise,
EPS has been diluted.
The reason for this is that the reverse P/E corresponds to net profit divided by share price, i.e. the immediate accounting return on a company's shares. If a company's shares are worth 100 and it reports a net profit of 5, its P/E is 20. The reverse of 20 is 5%, and this is the immediate return that is obtained when buying the shares of this company. As the stock is worth 100, the shareholder's share of net profit is 5.
If a company buys back its own shares for 100, it obtains an immediate accounting return of 5% and if it can take on debt at 3% after tax, we can see that it has achieved a positive margin (5% - 3%) and thus a book profit, thus explaining how EPS growth is achieved in this case.
But this is purely arithmetic and depends only on P/E and after-tax interest rates at which the company can finance its share buyback; it is not proof of value creation.