Does the implied equity risk premium make sense?

I am wondering about teh adequacy of taking dividends and buybacks in implied equity risk premium computations. I assume that firms that constitute the SP500 index don't pay their full income in dividends. I think it should be the aggregate FCFE in the numerator. Am I right?

Question

Does the implied equity risk premium make sense?

I am wondering about teh adequacy of taking dividends and buybacks in implied equity risk premium computations. I assume that firms that constitute the SP500 index don't pay their full income in dividends. I think it should be the aggregate FCFE in the numerator. Am I right?

anonymous · Answer

Where do you think companies come up with the cash for buybacks? From cash not paid out in prior years as dividends... So, it is true that you would like to use FCFE... but dividends + stock buybacks, especially when averaged over time, approximate the FCFE.