When companies engage in share repurchase activities that change the number of outstanding shares in a meaningful way, it can cause common measures of value to become less than fully representative of actual results. In such situations, the manner in which the financial community calculates trailing twelve month (TTM) earnings per share (EPS) and the resultant price to earnings (PE) multiple, yields metrics that are less favorable than they should be.
With large buybacks, the community’s simplistic calculation methodology results in a TTM EPS and resultant PE that is meaningfully different from reality. Similarly, historical prices measure a different level of market capitalization in these repurchase scenarios and this simple math is typically overlooked. Currently, Apple (NASDAQ:AAPL) illustrates both points.
Apple is in the midst of conducting the largest dollar volume stock repurchase in history. Apple’s share count (after adjusting for its June 2014 7-for-1 stock split) has been declining