Comparing a company’s historical EPS (earnings per share) data with the S&P 500 helps give insight on a company’s growth. It can tell investors whether that company is keeping up with the market or economy. It can also tell investors if that company deserves its valuation.
The reason to look at historical EPS growth to make future expectations is because track record matters. If a company has proven to grow EPS at a certain rate, it could continue to have that ability in the future.
Investments with great growth prospects generally involve companies in non-matured industries. Mature industries can slow future growth even if historical growth has been excellent. A company’s moat can be another key indicator of those that can continue higher growth rates.
In the end, historical EPS growth data is a start, not an end, to projecting future growth for valuation.
EPS Growth: The Importance of Context (Growth Calculations)
EPS growth calculations should be taken with context in mind. For example, knowing that a company grew EPS 200%+ or 0.4% YOY, in any given year, is usually not helpful because it’s such a limited snapshot.
Company earnings (and thus EPS) fluctuate, and can swing wildly from year to year—especially for cyclical companies.
If the starting or ending year is extremely low or high, the growth rate can get skewed due to just one extreme value. Cyclical commodities naturally swing to extremes of peaks and valleys, exacerbating this phenomenon.
This can also rear its ugly head in long term growth calculations too.
I love to use websites that quote long term Compounded Annual Growth Rate, or “CAGR” (such as 10Y EPS CAGR). But like with growth rate calculations, if the starting point or ending point of the formula is abnormally high or low, the calculation for 10Y EPS CAGR will be distorted. It probably won’t accurately represent the company’s true growth in EPS over the long term.
Instead of looking at an average of growth rates or CAGR, I like to take a median of 10 YOY (EPS growth) data. This can mitigate extreme fluctuations in values from year-to-year.
Historical EPS Growth Data (S&P 500)
To create this data table, I took the current S&P 500 constituents (as of July 2022), and had their historical diluted EPS data (20 years, from 2002-2021) transposed in an Excel spreadsheet.
Then, I took the YOY growth rates for each. Finally, I took the Median growth rate for every year in order to weed out extreme values, in order to find the final values for EPS growth.
Not every company reports their Fiscal Years from January to December, though a majority do. Taking the companies in the S&P 500 that have reported at least 9 months of data in the 2021 calendar year (81%), and examining this median diluted EPS growth in each year, results in the following table:
|Fiscal Year||EPS YOY|
You can see that the two years immediately following the “Great Recession” had superior EPS growth. This makes sense and corresponds to strong recovery growth after a “steep fall” in the depths of the recession.
I put “steep fall” in quotes because though the stock market saw huge double digit drops in those years, the actual diluted EPS drop was mostly minimal. Notice that, in aggregate, the median values for the S&P 500 for 2009 and 2010 just barely stayed in the negative single digits.
Also interesting… leading up to 2009 and 2010 the S&P 500 constituents saw double digit EPS growth for 5 years in a row.
In the 2010’s we saw a period of somewhat meandering growth, followed by a huge surges in 2018 (16.6%) and 2021 (25.5%). Some of the strongest growth prior to that included years that directly followed the Great Recession (such as 2010&2011).
KEY CAVEAT: Note that there is some survivorship bias in these numbers, as former S&P 500 constituents didn’t make the list. Only the historical growth numbers for current constituents was included.
Concluding thoughts (S&P 500)
I think seeing this historical EPS data on the S&P 500 helps to provide context when examining companies and their earnings histories. It’s very clear that periods of 5%-6% annual growth are normal, and aren’t something to worry about as long as double digit growth years are also in play for a company.
Periods of falling EPS on a YOY basis also aren’t worrisome if swiftly recovered from. The data suggests that most of the S&P 500 has been able to do that after each stumble.
METHODOLOGY: This dataset included all S&P 500 companies that reported at least 9 months of financials in the 2021 calendar year. Each company’s latest Fiscal Year (starting with 2021) was compared with its previous (for example, 2020), and a YOY growth rate was calculated. Then, the median of every company’s YOY growth in the dataset was calculated, by year.
The 410 companies included in this study had these ticker symbols:
MMM AOS ABT ABBV ATVI ADM AAP AES AFL APD AKAM ALK ALB ARE ALGN ALLE LNT ALL GOOGL GOOG MO AMZN AMD AEE AAL AEP AXP AIG AMT AWK AMP ABC AME AMGN APH ANSS AON APA AAPL APTV ANET AJG AIZ T ATO AVB AVY BKR BAC BAX BDX WRB BRK.B BIO BIIB BLK BK BA BKNG BWA BXP BSX BMY BRO CHRW CDNS CZR CPT COF CARR CAT CBOE CBRE CDW CE CNC CNP CDAY CF CRL SCHW CHTR CVX CMG CB CHD CI CINF C CFG CTXS CME CMS KO CTSH CL CMCSA CMA COP ED CEG GLW CTVA CTRA CCI CSX CMI CVS DHI DHR DVA DAL XRAY DVN DXCM FANG DLR DFS DISH DIS D DPZ DOV DOW DTE DUK DRE DD EMN ETN EBAY ECL EIX EW LLY EMR ENPH ETR EOG EPAM EFX EQIX EQR ESS ETSY RE EVRG ES EXC EXPE EXPD EXR XOM FFIV FAST FRT FITB FRC FE FIS FISV FLT FMC F FTNT FTV FBHS BEN FCX GRMN IT GNRC GD GE GM GPC GILD GL GPN GS HAL HIG HAS HCA PEAK HSIC HSY HES HLT HOLX HON HST HWM HUM HBAN HII IBM IEX IDXX ITW ILMN INCY IR INTC ICE IP IPG IFF ISRG IVZ IQV IRM JBHT J JNJ JCI JPM JNPR K KDP KEY KMB KIM KMI KHC LHX LH LVS LDOS LNC LIN LYV LKQ LMT L LUMN LYB MTB MRO MPC MKTX MAR MMC MLM MAS MA MTCH MCD MRK META MET MTD MGM MAA MRNA MHK MOH TAP MDLZ MPWR MNST MCO MS MOS MSI MSCI NDAQ NFLX NWL NEM NEE NLSN NI NSC NTRS NOC NCLH NRG NUE NVR NXPI ORLY OXY ODFL OMC ON OKE OGN OTIS PCAR PKG PARA PAYC PYPL PENN PNR PEP PKI PFE PM PSX PNW PXD PNC POOL PPG PPL PFG PGR PLD PRU PEG PTC PSA PHM PWR QCOM DGX RJF RTX O REG REGN RF RSG RHI ROK ROL ROP RCL SPGI SBAC SLB SEE SRE NOW SHW SBNY SPG SWKS SNA SEDG SO LUV SWK SBUX STT SYK SIVB SYF TMUS TROW TEL TDY TFX TER TSLA TXN TXT TMO TSCO TT TDG TRV TRMB TFC TWTR TYL TSN USB UDR UNP UAL UPS URI UNH UHS VLO VTR VRSN VRSK VZ VRTX VTRS VICI V VNO VMC WAB WBD WM WAT WEC WFC WELL WST WRK WY WHR WMB WTW GWW WYNN XEL XYL YUM ZBRA ZBH ZION ZTS
Andrew has always believed that average investors have so much potential to build wealth, through the power of patience, a long-term mindset, and compound interest.