S&P 500 Earnings Per Share: Operating vs. Reported

Chart of the Week for Nov. 14, 2008 - Nov. 20, 2008

The portion of total earnings allocated to each share of common stock is an important indicator of a company's earning power or profitability. This is commonly referred to as Earnings per Share ("EPS"). EPS can be calculated several ways, two of which are: Reported Earnings per Share ("Reported EPS") and Operating Earnings per Share ("Operating EPS"). Operating EPS excludes one-time costs, or costs that are not related to the company's core business. Investors and analysts use Operating EPS to: (1) smooth the affects of one-time charges on company earnings and (2) gauge the health of a company's core business.

The chart above compares Reporting and Operating EPS of the S&P 500 Index for the last 10 years. Both measures of earnings per share tend to move together with a narrow spread between them, but at certain times, move apart or have a larger spread. For instance, in September 2001 and December 2002 the spread between the Reporting and Operating EPS widened as companies reported larger one-time costs. A similar situation appears to be occurring now as the spread between Reporting and Operating EPS has widened.

The future direction of the S&P 500 Index is unclear, but it is important to note periods when Operating EPS and Reporting EPS diverge. These periods illustrate how companies cope with pressures that are not part of their core business. As investors evaluate their portfolio during these difficult times the various calculations of Earnings per Share are one of many considerations that may be reviewed prior to making an investment decision.

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