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How to Calculate Earnings per Share (EPS)
Earnings per Share is the allocation of a company's net income to each outstanding common share of stock. Earnings per Share is used by Wall Street & other stock market analysts to measure the profitability of a company versus another company in the same industry, plus is a way of evaluating quarterly financial results of the company. The formula for calculating Earnings per Share is:
Average outstanding shares is also known as the Weighted Average number of shares because since a company's outstanding shares on the stock market change all the time, we like to use an average that represents a fair number of shares throughout the year. Some companies use the outstanding number of shares at the end of one period in order to simplify their calculations.
Calculate Earnings per Share
Here's a hypothetical example. ZZZ Corp. has a net income of $50 million for the year ended December 31st, 2010 and has 20 million shares outstanding on the New York Stock Exchange (NYSE). The company does not have any preferred shares outstanding so it does not have to pay out any preferred dividends. What is the Earnings per Share?
Real Life Example - International Business Machines Corp. (Public, NYSE:IBM)
For its first quarter ended March 31st, 2010, IBM reported the following numbers (derived from its annual report):
- Revenue of $22.9 billion, up 5 percent,
- Net income of $2.6 billion, up 13 percent
- Pre-tax income of $3.5 billion, up 13 percent
- The weighted-average number of diluted common shares outstanding in the first-quarter 2010 was 1.32 billion compared with 1.35 billion shares in the same period of 2009. As of March 31, 2010, there were 1.28 billion basic common shares outstanding.
Using this data, let's calculate the Earnings per Share:
Analyst Estimates on EPS
Most large cap organizations in the United States have several Wall Street analysts that closely follow the company's earnings and business operations in order to forecast an earnings per share number. Analysts following a company like to issue EPS estimates for for the most recent quarter, the next quarter, the current fiscal year and the next fiscal year. The average of all analysts' estimates are tabulated and a final EPS estimate is released on the financial media. Other information that comes along with EPS estimates is:
i) Number of Analysts - This indicates the number of analysts that have provided estimates for this company and are closely monitoring the business.
ii) High/Low Estimates - This provides estimates of the low end of the EPS versus the high end; generally the closer these estimates are together, the more confident you can be of the earnings estimate.
Real Life Example: Shaw Communications (Public, NYSE:SJR) profits of $158 million top analyst estimates
CALGARY - Shaw Communications Inc. (Public, NYSE:SJR) reported better-than-expected third- quarter results Wednesday thanks to a growing base of digital, cable and Internet subscribers. The Calgary-based cable company reported net income of $158 million for the three-month period, compared to $132 million a year ago. That's worth 37 cents per share, topping analyst expectations of nearly 34 cents per share, according to a Thomson Reuters poll. Revenue increased 10 per cent to $943.6 million. Shares in Shaw rose 11 cents to $19.24 on the Toronto Stock Exchange around midday Wednesday.
Companies who do an earnings surprise, i.e. their earnings per share is higher than analyst estimates are handsomely rewarded on the stock market as investors rush to buy the stock.