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Buffett Buyback Math Key to Post Stress Test Bank Earnings

Given what could be an increasing focus on EPS, Goldman Sachs stands out as one of the lenders most affected by stress tests, being able to separate itself from peers like Morgan Stanley by way of buybacks.

That will be put on hold for a while as the company works to fix capital planning issues to better match the Fed's analysis.

In a press release, Goldman said it would hold off on returns of capital until the third quarter. "We are pleased to continue to have the flexibility to return capital to shareholders," said Chairman and Chief Executive Officer, Lloyd Blankfein.

Goldman's previously announced program to buy back up to roughly 11% of its outstanding shares in coming years may be the best hint for how the bank is gearing to return to pre-crisis earnings and valuations.

By reducing its share count, Goldman may be smoothing a new path towards earnings records, this time focusing on earnings per share over other metrics like return on equity, which remain stubbornly low.

During the fourth quarter of 2012, Goldman bought back $1.53 billion in shares, exceeding the $1.2 billion forecasted by Morgan Stanley analyst Betsy Graseck.

For all of 2012, Goldman bought back nearly $5 billion in stock, or a total of 42 million shares.

Goldman's authorization to buy back up to 46 million shares in coming years is the most aggressive among its investment banking peers after Morgan Stanley, Citigroup and Bank of America didn't submit 2012 buyback plans during Fed stress tests and JPMorgan halted a $15 billion multi-year buyback in August after it incurred what stands as an over $6 billion trading loss.

Citigroup and Morgan Stanley have already indicated they won't be focusing on reducing share counts in 2013.

In a press release after the initial stress test results were announced on March 7, Citigroup said it wouldn't raise its quarterly dividend of $0.01 a share, however, the bank will try to repurchase up to $1.2 billion in shares in 2013, a move that will offset potential dilution from stock-based compensation.

Since hitting a high of nearly 550 million in shares after taking $10 billion in Troubled Asset Relief Program funds and $5 billion in emergency capital from Warren Buffett and private investors, Goldman has reduced already reduced its share count by roughly 12% through repurchases.

In line with Goldman's authorization, International Strategy & Investment Group analyst Ed Najarian in August estimated that Goldman may yet cut its share count by 11%, putting shares at roughly 434 million.

Were Goldman's annual earnings to stabilize at say $10 billion, slightly above a three-year post crisis average of $8.71 billion, the bank's EPS would come exceed $23.00, which was the average of its 2006 and 2007 results.
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