Goldman Sachs' Bottom Line Growth Is Key Earnings Driver

NEW YORK ( TheStreet) -- Goldman Sachs ( GS) shares have been driving higher into 2013 on optimism of a recovering economy, investor inflows into stock markets and expectations that the standalone investment bank is well positioned for an eventual merger and acquisition wave.

While fourth quarter earnings are likely to show Goldman Sachs at the head of the Wall Street pack when it comes to underwriting and trading revenue, the bank still has room to prove to investors it stands apart from peers such as Morgan Stanley ( MS).

Notably, Goldman is one of just a handful of banks that's been able to deploy excess capital to reduce its share count in recent years, helping to return its earnings per share to pre-crisis levels, even if other metrics like absolute revenue and return on equity remain well below 2007 levels.

As Goldman focuses on right sizing its expense and balance sheet, investors should pay attention to capital returns -- and share buybacks in particular -- as a key part of the bank's share performance in 2013 given uncertainty surrounding trading and investment banking revenue.

" Goldman should be able to step up their share repurchases and dividend payments," says Michael Wong, an equities analyst with Morningstar, of his expectation of greater capital returns in 2013. Wong notes that given the cyclicality of Goldman's earnings, the bank generally prefers share repurchases over dividend payouts, which are harder to change in uncertain economic environments.

Currently, Goldman, like its large cap banking peers, has submitted a capital plan for the Federal Reserve's that will drive any added share repurchases or dividends in 2013.

Already, Goldman has been able to deliver predictable share repurchases that go straight to the bottom line for shareholders.

A Jan. 14 analysis by bank research firm KBW shows that among banks submitting capital plans to the Fed, Goldman is one of just five firms that's been able to consistently reduce its share count through share repurchases in the wake of the crisis. Meanwhile, in 2012, the KBW analysis shows Goldman is one of just seven banks who's total payout ratio of dividends and net repurchases is greater than 50% of profits.

"This group of large-cap banks are positioned well for total return investors, in our view, and will likely be added as core holdings to portfolios in 2013," writes KBW analyst Frederick Cannon, in the client research note.

Such expectations contrast sharply with Goldman's main standalone investment banking competitor Morgan Stanley that -- like Bank of America Merrill Lynch ( BAC) -- has seen its share count exceed overall asset growth. " Capital management will be critical in a slow-growth, highly regulated, banking world... the most successful banks will need to be reducing shares outstanding to achieve strong EPS growth," Cannon adds.

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