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Inside the S&P 500: Multiple Share Classes

2013: A year in SPIVA Perspective (Part I)

Companies buy fewer shares, but issue even less, reducing their share count and pushing up EPS

Don't just do something, sit there.

Earnings Per Share 101

Inside the S&P 500: Multiple Share Classes

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David Blitzer

Managing Director and Chairman of the Index Committee

S&P Dow Jones Indices

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Later this week when Google’s class C shares begin trading there will be 500 companies but 501 different ticker symbols and stocks in the S&P 500.  And beginning September 15, 2015, companies in the 500 which have multiple share classes will have all their liquid classes included.  The weight of each company will represent the total float available to shareholders, just as it does today.

Multiple share classes are becoming more common in the US, especially among technology companies.  The usual reason is either super-voting stock (shares with more than one vote) or non-voting stock to insulate management from takeovers or activist investors.  S&P Dow Jones Indices has included multiple share classes in some foreign indices covering markets where they are common. The increasing use in the US, as highlighted by Google’s new class C shares which begin trading this week, led to a review of the index methodology for the S&P 500 and our other US indices.  Under the current methodology, S&P DJI identifies the most liquid class and then increases its share count to account for all classes.  This approach works well when the less liquid class is small so the increase to the share count of the liquid class is also small. However, when the excluded class is as large as the included class – as is the case with Google classes A or C – the increase in the share count can be large enough to raise concerns about liquidity.  Likewise, in sector or strategy indices with fewer stocks and larger weights on each stock, increasing share counts to adjust for less liquid classes could affect liquidity.

While the shift for Google’s new class C is being done now, the shift to multiple share classes for other companies in the S&P 500 (and the S&P 100, S&P 400, and S&P 600) will be done in September 2015. (yes – 2015).  This will involve several stocks and both advance planning and advance notice to market is important.

Starting on April 3rd, the S&P 500 will still have 500 companies, but there will be 501 stocks.  The “extra” stock will be Google class C with no votes and Google’s current ticker symbol GOOG. Google class A with one vote will get a new ticker, GOOGL.  The tickers are set by NASDAQ and Google.  Google class B shares which have 10 votes per share are closely held by management and don’t trade. Since the class B doesn’t trade, it is not in the S&P 500.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

2013: A year in SPIVA Perspective (Part I)

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Aye Soe

Managing Director, Global Head of Product Management

S&P Dow Jones Indices

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2013 was the blockbuster year for equity as the domestic equity markets posted double-digits returns.  In a year marked by record breaking gains, it is particularly important to measure the relative performance of active funds versus the indices as bull markets often present challenging conditions for active managers to overcome. The 2013 year-end SPIVA report findings confirm that while active managers may do very well on an absolute basis, the majority of them can end up underperforming on a relative basis, at times by narrow margins.

Looking at the large cap space, the S&P 500 returned 32.39% for the year while the median quartile breakpoint for the large cap core category is 31.92%.  This slim spread of 47 basis point difference in returns is reflected in the underperformance of large cap core funds against the benchmark by a narrow majority (57.74%).

Small cap space, however, tells a different story.  The S&P SmallCap 600 had its best year since the launch in 1994, posting 41.31%.  The first quartile breakpoint of 40.85% for small cap core active funds indicates that a quarter of the funds were able to outperform the benchmark on a relative basis, albeit by a narrow margin of 0.46%.

Mid cap space is the only category in which the active managers fared well against the benchmark in 2013.  The S&P MidCap 400 Index gained 33.5% for the year.  The median mid cap core manager posted 34.91%, highlighting that the majority of the active mid cap managers were able to beat the benchmark by a good margin.

Over a longer-term investment horizon, even an underperformance or outperformance by a small return margin in one year can translate into a meaningful difference as compounding kicks in.  When viewed over the five-year horizon, active managers across all market cap segments and style underperformed their respective benchmarks.

Exhibit 1:  The Percentage of U.S Equity Active Managers Outperformed by Benchmarks

Source:  S&P Dow Jones Indices, CRSP.  Data as of 12/31/2013.

Exhibit 2:  One and Five-Year Quartile Breakpoints of U.S Equity Funds

Source:  S&P Dow Jones Indices, CRSP.  Data as of 12/31/2013.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Companies buy fewer shares, but issue even less, reducing their share count and pushing up EPS

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Howard Silverblatt

Senior Index Analyst, Product Management

S&P Dow Jones Indices

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Companies continue to increase their shareholders’ returns through buybacks and cash dividends. These two expenditures, combined, reached $214.4 billion in the fourth quarter – the second highest level (Q3 2007 holds the record at $233.2 billion) and three times the Q2 2009 Bear market level ($71.8 billion). Helping companies do this are record earnings, record cash-flow and record cash reserves; pushing companies are activist investors and the growing concern within board room over outside holders ‘coming in’.
While dividend payments are historical high, the payout rate remains low, with dividends being 36% of As Reported earnings compared to an historical 52% (from 1936).
Buybacks need to be measured against issuance, and for Q4 more companies decreased their diluted share count, even as purchases slowed.
I expect this trend of greater shareholder return to continue throughout 2014 (ain’t no bodies opinion but my own).
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Q4,’13 buyback takeaway -> companies buy fewer shares, but issue even less, reducing their share count, and pushing up EPS
Q4,’13 buybacks increased 30.5% to $129.4B from Q4,’12 $99.1B, buy are up only 1.0% from Q3,’13 $128.2B level
2013 buybacks increases 19.2% to $475.6B from 2012 389.8B -> just keeping up with the average of daily prices are also up 19.2%
Share counts go down, as companies buy more shares than they issue (it’s not just what you buy, but what you issue)
For Q4,’13, 276 issues reduced their diluted share count (263 in Q3), with 185 increasing them (188 in Q3)
Significant changes of at least 1% in the quarter increased, with 112 issues reducing their count (106 in Q3,’13) and 24 increasing them at least 1% (28 in Q3,’13)
For 2013, 272 issues reduced their diluted share count, with 200 increasing them
Significant changes of at least 4% for the year were 83 issues reducing their count and 39 increasing them at least 4%
Of the 401 issues which reported buybacks in 2013, 339 of them pay a dividend, with 196 of them spending more on dividends than buybacks
Cash (S&P Industrials Old) sets a sixth consecutive record high -> $1.3 Trillion, the equivalent of 94 weeks of net income siting on the books (here and abroad), earning very little, but getting a lot of attention

Information Technology maintained its dominance of buybacks, accounting for 26.7% of all buybacks in Q4,’13, up from 25.9% in Q3
Materials and Utilities (a minor player) significantly increased their buybacks in Q4,’13

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The posts on this blog are opinions, not advice. Please read our Disclaimers.

Don't just do something, sit there.

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Tim Edwards

Managing Director, Index Investment Strategy

S&P Dow Jones Indices

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At the beginning of this year, we suggested that 2013 might well have been a another tough year for active managers. Judging from the response received at the time, this expectation was somewhat controversial: the more common refrain was to point to falling correlations during 2013 and predict a return to “stock-pickers’ market.” In such an environment, the reasoning goes, it pays to be more active with your investments.

Our regular SPIVA® scorecard regularly reports on the relative performance of active managers, and the full-year 2013 results are in. Last year, roughly 45% of U.S. large-cap funds achieved the distinction of outperforming the S&P 500® – a touch up from the previous year, but still a strong validation for passive investors.

OutP

Source: S&P Dow Jones Indices Data for 2007 are to March end; all other years are full calendar years. Charts are provided for illustrative purposes. Past performance is no guarantee of future results.

Moreover, it seems our forecasts regarding 2013 were correct in a second respect. Based on our research on dispersion, we expected to see a relatively narrow spread between the best and the worst managers (again, despite falling correlations). The data show that for large-cap core U.S. equity funds (the subject of our original research), 2013’s interquartile range between the best and worst performers was indeed fairly low, and continues to be well-paralleled by dispersion.

Spread

Source: S&P Dow Jones Indices Data for 2007 are to March end; all other years are full calendar years. Charts are provided for illustrative purposes. Past performance is no guarantee of future results.

While it remains unclear whether the choppy markets of 2014 will provide a more conducive environment for active managers, those who wish to leaven their analysis with the latest values of dispersion may be interested in reading our ongoing commentary.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Earnings Per Share 101

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Howard Silverblatt

Senior Index Analyst, Product Management

S&P Dow Jones Indices

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Types And Sources

In the U.S., there are two main types of income: as reported and operating. As reported income, sometimes called Generally Accepted Accounting Principal (GAAP), is income from continuing operations and it excludes discontinued and extraordinary income. Both of these terms are defined by the Financial Accounting Standards Board (FASB) under GAAP. As reported earnings represent the longest-monitored earnings series available today.

Operating income, by contrast, excludes unusual items from that value, and companies began reporting it in 1988. The intent for operating earnings is to show how much companies make from their operations (making widgets), excluding corporate expenses and unusual items. Operating income is not defined under GAAP by the FASB; however, companies are required to reconcile how they get from their operating income figures to their as reported income figures. This permits individual companies to interpret what is (and what is not) unusual. The result is a varied interpretation of items and charges, in which the same specific type of item may be included in operating earnings for one company and omitted from operating earnings for another company. Additionally, during difficult times, the term ‘unusual’ appears to be used more liberally.

S&P uses methodology to ensure items included (or excluded) from operating earnings are consistent across sector lines, in order to permit issue comparison. In general, as reported earnings are less than operating earnings, since they exclude corporate expense and write-offs. However, on occasion, the situation occurs where there are unusual income items, which reverses the normal trend.

Things get a bit more complicated for index-level estimates because there are two methodologies used for calculating the S&P 500 index level estimate: bottom-up and top-down. Bottom-up estimates come from the covering equity analyst for their specific issue. We then build up the index level estimate by combining all 500 issue level estimates, after each issue’s estimate is adjusted for its index weight. These are the more commonly used estimates on the street. On an issue level, bottom-up estimates are typically the ones used to determine if a company met expectations or not.

Top-down index-level estimates are usually supplied by economists and strategists on an index and (sometimes) sector level. They use a broad array of indicators and matrices based on economic and market history to project the index level earnings estimate. The economists or strategists never come down to the issue level and say how much a company will make, but instead make their estimates from the top down. They may adjust the index, sector, or group estimate based on overall economic beliefs, such as expected employment, tax rates, government costs, and expenditures. Economists will typically create estimates that project over many years, while strategists will generate them for just a few years (similar to equity analysts).

S&P Dow Jones Indices
S&P 500 Quarterly Earnings Per Share
QUARTER OPERATING AS REPORTED
EARNINGS EARNINGS
12/31/2014 Est. $32.13 $30.60
09/30/2014 Est. $30.71 $30.80
06/30/2014 Est. $29.72 $29.20
03/31/2014 Est. $27.77 $30.00
12/31/2013 Prelim. $28.24 $26.51
09/30/2013 $26.92 $24.63
06/30/2013 $26.36 $24.87
03/31/2013 $25.77 $24.22
12/31/2012 $23.15 $20.65
09/30/2012 $24.00 $21.21
06/30/2012 $25.43 $21.62
03/31/2012 $24.24 $23.03
12/31/2011 $23.73 $20.64
09/30/2011 $25.29 $22.63
06/30/2011 $24.86 $22.24
03/30/2011 $22.56 $21.44
12/31/2010 $21.93 $20.67
09/30/2010 $21.56 $19.52
06/30/2010 $20.90 $19.68
03/31/2010 $19.38 $17.48
12/31/2009 $17.16 $15.18

 

Expectation Versus Reality (Or Normalized Versus Methodology)

Operating earnings per share (EPS) is the dominant focus on the street. Equity analysts make their projections based on operating EPS, and most news reports cite them. In this case there are different versions of estimates. The two groups of estimates each have different functions and roles, similar to fundamental and technical analysis, and each group has its strengths. On an index level, a brokerage house may aggregate the S&P 500 earnings estimate based on the estimates supplied to it from their own covering analyst. Since estimates on issues differ, brokerage house index levels estimates differ as well (since their contributing analysts differ).

On a larger scale, several companies gather estimates and calculate a consensus estimate, which is widely reported in the press. S&P Capital IQ (CIQ) is one of the providers that gathers the estimates, so it can be used as an example. The CIQ numbers represent what the covering equity analysts are predicting at a certain point in time, meaning it is closely tied to the analysts’ current expectations and to the market. CIQ takes steps to ensure that when it calculates a consensus estimate for an issue, all of the analysts are predicting the same situation, meaning that if there is an item being excluded or included in the earnings, this is being done uniformly. For that reason, there may be 25 covering analysts but only 22 are used (typically the estimates are uniform).

The consensus number is the estimate which is used to determine a beat or miss. Generally, this estimate also shapes how the market initially reacts. Because of the nature of the market, analysts’ approach sometimes change their estimates, and an item in one industry may not be an item in another industry. Further, even within an industry there can be differences. Again, the strength and intent of the number is to show what analysts who cover that stock are currently thinking. Once the results are released, the number used for CIQ history is the one that matched up with the estimate. Therefore, if an item was excluded in the estimate, it will be excluded from the history. This process is known as ‘normalizing’

S&P Indices (which is separate from CIQ) uses a methodological approach to the S&P 500 earnings. In general, an item is included or excluded across all of the issues in the index. This permits comparisons of sectors and industries, and most of all, companies. Therefore, the result is also compatible with the index price, dividends, balance sheet items, etc. The strength of that number is its defined methodology, uniformity, and comparability–you know exactly what you are getting (there is no black box). Typically, the index level number is used on a higher level to analyze markets, sectors, and industries.

On an issue level, it permits comparison for screening and relative positions. However, many brokerage houses will note or modify certain S&P data on the lower-end (issue or group) so their specific approach to an issue can be incorporated (obviously, each house is slightly different). Since the index data are uniform and methodology-based, this adjustment can be done. The data can be thought of, in the context of building a house, as a series of 2’x8’ logs, each made with the same specifications. For most of the house, those uniform pieces would be exactly what one would want, but for parts of the house that log would need to be crafted. The good news is that the exact specifications of the log are known, so ‘crafting’ is possible.

S&P Dow Jones Indices
S&P 500 Quarterly Earnings Per Share
QUARTER OPERATING OPERATING % EPS
INDEX CIQ CIQ /IDX
12/31/2013 Prelim. $28.24 $28.45 0.76%
9/30/2013 $26.92 $27.53 2.27%
6/28/2013 $26.36 $26.92 2.12%
3/30/2013 $25.77 $26.71 3.65%
12/31/2012 $23.15 $26.36 13.85%
9/28/2012 $24.00 $26.05 8.54%
6/29/2012 $25.43 $25.67 0.95%
3/30/2012 $24.24 $25.40 4.77%
12/30/2011 $23.73 $24.46 3.10%
09/30/2011 $25.29 $25.44 0.60%
06/30/2011 $24.86 $25.46 2.43%
03/31/2011 $22.56 $23.63 4.73%
12/31/2010 $21.93 $22.58 2.97%
09/30/2010 $21.56 $21.62 0.28%
06/30/2010 $20.90 $21.36 2.19%
03/31/2010 $19.38 $19.74 1.87%
12/31/2009 $17.16 $16.53 -3.65%
DISCLAIMER
The analyses and projections discussed within are impersonal and are not tailored to the needs of any person, entity or group of persons. Nothing presented herein is intended to, or should be interpreted as investment advice or as a recommendation by Standard & Poor’s or its affiliates to buy, sell, or hold any security. This document does not constitute an offer of services in jurisdictions where Standard & Poor’s or its affiliates do not have the necessary licenses. Closing prices for S&P US benchmark indices are calculated by S&P Dow Jones Indices based on the closing price of the individual constituents of the Index as set by their primary exchange (i.e., NYSE, NASDAQ, NYSE AMEX). Closing prices are received by S&P Dow Jones Indices from one of its vendors and verified by comparing them with prices from an alternative vendor. The vendors receive the closing price from the primary exchanges. Real-time intraday prices are calculated similarly without a second verification. It is not possible to invest directly in an index. Exposure to an asset class is available through investable instruments based on an index. Standard & Poor’s and its affiliates do not sponsor, endorse, sell or promote any investment fund or other vehicle that is offered by third parties and that seeks to provide an investment return based on the returns of any S&P Index. There is no assurance that investment products based on the index will accurately track index performance or provide positive investment returns. Neither S&P, any of its affiliates, or Howard Silverblatt guarantee the accuracy, completeness, timeliness or availability of any of the content provided herein, and none of these parties are responsible for any errors or omissions, regardless of the cause, for the results obtained from the use of the content. All content is provided on an “as is” basis, and all parties disclaim any express or implied warranties associated with this information. The notes and topics discussed herein are intended to quickly inform and are only provided upon request. If you no longer wish to receive this information or if you feel that the information does not suit your needs, please send an email to Howard.silverblatt@spdji.com and you will be removed from the distribution list. A decision to invest in any such investment fund or other vehicle should not be made in reliance on any of the statements set forth in this document. Standard & Poor’s receives compensation in connection with licensing its indices to third parties. Any returns or performance provided within are for illustrative purposes only and do not demonstrate actual performance. Past performance is not a guarantee of future investment results. STANDARD & POOR’S, S&P, and S&P Dow Jones Indices are registered trademarks of Standard & Poor’s Financial Services LLC. – See more at: https://www.indexologyblog.com/2014/03/07/buybacks-and-the-sp-500-eps/#sthash.3aVDVSOX.dpuf

The posts on this blog are opinions, not advice. Please read our Disclaimers.