Calculating Earnings Per Share for Post-Retirement Benefits

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  • 0:04 Earnings Per Share
  • 1:22 Diluted Earnings Per Share
  • 2:28 Post-Retirement Considerations
  • 4:10 Lesson Summary
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Lesson Transcript
Instructor: Ian Lord

Ian has an MBA and is a real estate investor, former health professions educator, and Air Force veteran.

In this lesson we will look at how retirees can determine and use the earnings per share of a company to evaluate the profitability of shares of stock in their retirement investment portfolios.

Earnings Per Share

As a new retiree, Jon has an investment portfolio which consists of shares in many profitable corporations. Since he will depend on the income from his portfolio for the rest of his life, he wants to be sure that the investments continue to be good ones. Let's take a look at how Jon can use the earnings per share formulas to assess the strength of his different stock investments.

The basic earnings per share expresses how much profit is created for each share of common stock in the company. For example, Jon owns shares in the XYZ Company. The company made $10 million in profits last year, paid out $100,000 in dividends to preferred shares, and has an average of four million total shares of common stock over the year. Preferred stock offers guaranteed dividends, and prioritizes those dividend payments over the common stock available to regular investors, using the earnings per share formula:

EPS = (Net Income - Preferred Stock Dividends) / Average Outstanding Shares

Now, if we plug Jon's information into the equation, we get:

($10,000,000 - $100,000 ) / 4,000,000 = $2.48

So XYZ earned $2.48 cents for each share of stock in existence this past year.

Diluted Earnings Per Share

The basic earnings per share assumes a simple capital structure. Many publicly traded companies offer employee stock options or bonds which could be converted into common stock. This extra complexity means that the earnings per share could change if all of these convertible securities were to turn into actual shares. The diluted earnings per share formula allows Jon to account for this possibility.

DEPS = (Net Income - Preferred Stock Dividends) / (Average Outstanding Shares + Diluted Shares)

Using our same figures as before, let's add on that XYZ would create one million new shares if all of its stock options were exercised. This gives Jon:

($10,000,000 - $100,000) / (4,000,000 + 1,000,000)

Which converts to:

($900,000) / (5,000,000) = $1.80

Adding in the potential shares reduced Jon's earnings per share. Because there are more shares to allocate a portion of corporate profits to, the diluted earnings per share will always be the same or lower than the basic earnings per share.

Post-Retirement Considerations

Now that we know how to compute the earnings per share using the basic and diluted formulas, how does this help Jon?

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