Large Spread Between Non-GAAP EPS and GAAP EPS for Dow 30 Continued in Q4 2020

While all publicly traded U.S. companies report EPS on a GAAP (generally accepted accounting principles) basis, many U.S. companies also choose to report EPS on a non-GAAP basis. There are mixed opinions in the market about the use of non-GAAP EPS. Supporters of the practice argue that it provides the market with a more accurate picture of earnings from the day-to-day operations of companies, as items that companies deem to be one-time events or nonoperating in nature are typically excluded from the non-GAAP EPS numbers. Critics of the practice argue that there is no industry-standard definition of non-GAAP EPS, and companies can take advantage of the lack of standards to exclude items that (more often than not) have a negative impact on earnings to boost non-GAAP EPS.

As of today, all of the companies in the Dow Jones Industrial Average (DJIA) have reported actual EPS for Q4 2020. What percentage of these companies reported non-GAAP EPS for Q4 2020? What was the median difference between non-GAAP EPS and GAAP EPS for companies in the DJIA for Q4 2020? How did these differences compare to recent quarters?

For Q4 2020, 23 (77%) of the 30 companies in the DJIA reported non-GAAP EPS in addition to GAAP EPS for the fourth quarter. Since 2016, 22 (73%) of the companies in the DJIA have reported non-GAAP EPS in addition to GAAP EPS on average. Thus, the number of companies in the DJIA reporting non-GAAP EPS for Q4 2020 was just slightly above the average since 2016.

Of these 23 companies, 17 (74%) reported non-GAAP EPS that exceeded GAAP EPS. Since 2016, 74% of companies in the DJIA have reported non-GAAP EPS that exceeded GAAP EPS on average. Thus, the percentage of companies in the DJIA reporting non-GAAP EPS above GAAP EPS for the fourth quarter was equal to the average since 2016.

The median difference between non-GAAP EPS and GAAP EPS for these 23 companies was 31.7%. Since 2016, the median difference between non-GAAP EPS and GAAP EPS has been 11.0%. Thus, the median difference between non-GAAP EPS and GAAP EPS for DJIA companies in Q4 2020 was much higher than the median difference since 2016.

In fact, the fourth quarter marked the second consecutive quarter in which the median difference between non-GAAP EPS and GAAP EPS for companies in the DJIA exceeded 30%. It also marked the third highest median difference between non-GAAP EPS and GAAP EPS for the DJIA since FactSet began tracking this metric in 2016, trailing only Q4 2017 (due to one-time items associated with tax reform) and the previous quarter.

What is driving the unusually large spread between non-GAAP and GAAP EPS for the DJIA over the past two quarters?

It does not appear to be related to the recent constituent changes to the DJIA. Amgen, Honeywell, and Salesforce replaced Exxon Mobil, Pfizer, and Raytheon Technologies in the DJIA during Q3 2020. All three of the companies that were added to the index have reported non-GAAP EPS in recent quarters, while all three of the companies that were replaced also had reported non-GAAP EPS in recent quarters. It is interesting to note that if the three previous constituents (Exxon Mobil, Pfizer, and Raytheon Technologies) were still in the DJIA today, the median difference between non-GAAP EPS and GAAP EPS would still have been above 30% for both Q3 2021 (36.5%) and Q4 2021 (38.2%). Therefore, it does not appear the change in constituents is the cause of the wider spread.

The five companies in the DJIA that had the largest differences on a percentage basis between non-GAAP EPS and GAAP EPS in Q4 2020 are listed in the table below. It is interesting to note that three of these five companies (Merck, Walgreens Boots Alliance, and Walt Disney) were also on the top five list in Q3 2020 for the companies in the DJIA with the largest differences between non-GAAP EPS and GAAP EPS.

DJIA: Top Five Non-GAAP EPS > GAAP EPS for Q4 2020 (Source: FactSet)

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