Every Share Counts: The Impact of Buybacks on Markets

Earnings expectations across many markets have been reset lower in 2025 as companies contend with higher input costs and fading consumer demand. Among major markets, the sharpest revisions have been in the U.S. (-4%) and other developed markets (DM) — a reversal that has occurred despite the Trump administration’s pause on new tariffs.

Changes in short-term EPS estimates between Dec. 31, 2024, and May 31, 2025. The axes are clipped to improve readability.

But earnings are only one of the components of equity performance. Dividend policy, reinvestment rates and, critically, share-buyback activity — all ways capital can be returned to shareholders — often matter just as much in shaping long-term returns. 

Since the 2008 global financial crisis, the choice of how a company returns capital to its shareholders has varied from region to region. DM companies, led by the U.S., have retired shares, raising buybacks to a record level and boosting earnings per share (EPS). Many emerging-market (EM) firms, in contrast, have raised fresh equity to finance expansion, potentially diluting existing holders. This buyback gap has been a persistent, if underappreciated, contributor to DM outperformance. 

Here, we show how investors can measure that dilution — both at the market level and for individual companies — and gauge its impact on shareholder returns. 

Index dilution deserves a close look 

At the company level, issuing new shares raises capital but typically reduces each existing share’s claim on future profits, whereas buybacks do the opposite.¹ Younger, faster-growing firms generally expand share count, while mature, cash-generating companies typically engage in buybacks. The analysis at the index level gives a market-wide view of how management teams are collectively allocating capital and whether the market is growing or contracting relative to the broader economy.  

In 2003, William Bernstein and Rob Arnott showed that high issuance helps explain why aggregate EPS growth often trails GDP growth.²  Patrik Schöwitz and Michael Albrecht demonstrated in 2015 that changes in an index divisor provide a practical way to track dilution across various markets.³  A rising divisor signals net issuance and, all else being equal, a headwind to per-share earnings. A falling divisor implies that buybacks are, on balance, shrinking the share base and amplifying EPS.  

Historical data highlights the persistent dilution in many EM countries, led by Qatar, Saudi Arabia and China. In contrast, DM countries, such as Ireland, Netherlands and the U.S., had negative dilution, reflecting buybacks that surpassed new share issuance. Other DM, including Japan and Europe, exhibited moderate dilution patterns. 

Sample period is from June 1, 2002, to May 31, 2025. The index’s inception date is considered the start date for indexes launched after June 1, 2002. Index dilution is measured by the percentage change in the index divisor. The index divisor for day t is defined as the ratio of the initial market capitalization of the index to its previous day’s index-level price. A positive annual rate of index dilution typically indicates net share dilution, while a negative value indicates net share buybacks. For more information on the index divisor, please refer to MSCI Index calculation methodology. 

Is this dilution primarily from capital-raising activities or simply from firms being added or deleted from an index? Understanding such nuances is important for investors given their varying implications on shareholder returns. 

How index dilution happens can impact EPS 

An analysis of index dilution can offer broad insights, but we can gain greater clarity by attributing the dilution to its source, whether from existing firms or from new additions and deletions to the index. For example, consider China or India: Is their index dilution driven mainly by incumbent firms or by new additions, such as initial public offerings (IPOs)? A detailed breakdown of dilution sources, as shown below in the interactive chart, can help us answer this question. 

Sample period is from Jan. 1, 2009, through April 30, 2025. We show the index-dilution decomposition for selected major DM and EM using MSCI market-cap indexes.

The following table provides more information on the three major components of index dilution and the implications associated with each. 

We used the MSCI Equity Factor Models in our analysis to highlight the significance of prudent capital-return policies in outperformance, especially when viewed through the investment-quality factor lens. The issuance-growth factor, which tracks yearly changes in shares outstanding, has consistently rewarded firms that raise capital through disciplined share expansion. 

Over the last nearly 30 years, in the major regional markets, firms that maintained conservative issuance policies outperformed aggressive diluters, a trend amplified after the COVID-19 pandemic. For instance, in Japan, recent corporate-governance reforms notably improved returns for disciplined issuers. 

Returns are expressed as a decile spread and are cumulative from Dec. 31, 1994, through April 30, 2025. The decile-spread portfolio (long the top decile and short the bottom decile) is calculated over the MSCI ACWI Investable Market Index’s universe of each region. The issuance-growth factor goes long companies with disciplined net-issuance growth.

The importance of these insights differs across investor segments. An active manager may lean toward selecting firms that practice disciplined capital-allocation policies, and an index investor may opt to leverage factor-focused indexes that emphasize metrics such as buyback yield and total shareholder return.⁴ Strategic asset allocators, however, may place greater significance on incorporating dilution patterns into their capital-market assumptions. 

Evaluating index dilution to achieve more-sustainable returns 

As earnings growth slows across major markets, capital-return policies — particularly share buybacks and equity issuance — can be expected to contribute more meaningfully to a shareholder’s total return. Analyzing index dilution can help investors gain a more-nuanced understanding of these dynamics, calling attention to the divergence between capital-allocation strategies in EM and DM. By carefully evaluating index-dilution patterns, investors can more effectively identify markets and companies where disciplined capital management aligns with sustainable, long-term returns for shareholders. 

The author would like to thank Anil Rao and Raman Subramanian for their contributions to this blog post.