A common belief among practitioners and academics is that the increased EPS
associated with a stock repurchase creates value for a firm’s
shareholders. This belief is flawed. With the use of a numerical example and an
analysis of ExxonMobil’s recent stock repurchases, this article
demonstrates the magnitude of the distortion that arises from using EPS to make
such repurchase decisions. The effect of share repurchase is also compared with
the effects of alternatives—payment of dividends and cash accumulation.
Relative to cash accumulation, neither the negative effect of dividends nor the
positive effect of repurchases on EPS is associated with changes in the wealth
of shareholders at time zero.