How Share Buybacks Can Change a CAPE Comparison

CAPE is calculated from market prices and historical earnings per share. That makes corporate payout policy relevant: a company can distribute cash through dividends, share repurchases, or a mix of both, and repurchases can change the number of shares across which earnings are divided.

Robert Shiller's historical data page notes that the shift toward repurchases may affect the growth rate of earnings per share used in CAPE. It also provides a total-return version of the series that adjusts the price and earnings data in a different way.

Why per-share earnings can move differently from total profit#

If a company earns the same total profit but has fewer shares outstanding after repurchases, earnings per share can rise. That arithmetic does not by itself tell us whether the company's operations improved, whether the repurchases were made at a sensible price, or whether shareholders received an attractive total return.

Dividends and repurchases also affect how shareholder distributions show up in a historical index series. As payout practices change, an earnings-per-share comparison across long periods can reflect both operating performance and the way companies distribute capital.

This is a different adjustment from CAPE-H#

Palazzo's proposed CAPE-H focuses on adding back R&D expense and excluding special items. Shiller's total-return CAPE addresses payout-policy changes through a separate method. These adjustments target different measurement questions, so one should not be described as a substitute for the other.

When reading a long-run valuation comparison, check whether it uses reported earnings per share, a total-return construction, or a measure that adjusts accounting expenses. Then keep the price series and earnings series consistent with the question being asked.

For the accounting adjustments in CAPE-H, read CAPE-H explained. This article is part of CAPE, Accounting and Long-Term Stock Returns: A Plain-English Pillar Guide.