JPMorgan: How Dilution And Share Buybacks Impact Equity Returns

JPMorgan's 2015 Long-Term Capital Market Return Assumptions booklet lays out the bank's annual assessment of the long-term outlook for all major asset classes and alternative strategy classes. In addition, the 90-page document contains a wealth of analysis on factors that influence equity returns. One such study looks at how dilution and share buybacks impact equity returns -- two related issues commonly overlooked or mishandled when projecting future equity returns.

Indeed, many analysts project future equity returns based on economic growth rates. However, research has shown that historically, earnings per share have grown at a slower pace than the overall economy due to the effects of dilution. Failure to account for this factor can result in overly optimistic estimates. Moreover, the increased importance...