No Science, No Startups: the Innovation Engine We're Switching Off
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The article argues that the decline in government funding for basic science is stifling innovation and startup growth, sparking a heated discussion on the role of government in scientific research and the consequences of prioritizing short-term gains.
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If you love control and have control, why would you want to create fertile ground for startups?
(This was meant as devil's advocate, not my personal point of view).
You can't stop innovation across the planet, you will lose control over time as adversaries continue to innovate and subsume antiquated control structures.
It looks like long term risky bet on new technology to me - exactly what you want those rich capitalist do.
I can see it as a rational strategy if you're worried successors won't be up to the job.
Hitler for example thought he was justified. And so do all the people who claim global warming isn’t real.
Which is exactly what our system encourages. You don’t need to think beyond the next quarter / election cycle. You’re only in it to extract as much wealth in the short-term as possible and secure your chair before the music stops playing.
When a company or a society is threatened the usual response is to double down on things that accelerate decline like killing novelty and innovation.
These things worked when we were small primates fighting over limited food sources on the savannah. Our brain stems don’t know what millennium they are in and still run those programs.
I'm not seeing how you get from share buybacks to a shift in priorities in corporate research. If there's a fundamental reason why it can't be done now how it was before the 80's it's not that.
Suddenly they had a more lucrative was to spend their money, so they did.
Convert X% of a stocks value into a dividend and you pay taxes on that before you can buy more stock, but someone who keeps buying stock sees an exponential return. (Higher percentage of the company = larger dividends)
A company buys back X% of its stock functions like a dividend w/ stock purchase, but without that tax on dividends you’re effectively buying more stock. Adding a tax on stock buybacks could eliminate such bias, but it’s unlikely to happen any time soon.
On the other hand, a ton of amazing inventions came out of that system which created entire industries that went on to turbocharge the economy and create millions of jobs. I can see how someone may feel that a company being able to inflate it's stock price more is less useful to humanity and not worth the trade.
There may have been other reasons as well for the collapse of corporate research like changing tax rates, or maybe we were just in a golden age (1940s-1980s) as new advancements in physics and materials science allowed for a rapid amount of discoveries and now we're back in a slower period.
It's not only share buybacks, I would include offshoring, DEI, and a consolidation of management power as major factors in the destruction these labs. The pipeline has been so bad for so long now that it would take a miracle to get things started again.
The last org I worked at offshored the most promising work to China. Due to some high up international agreement the company had to spend $X on offshored workers so not only were they considered cheap they were considered free because the money had to be spent anyway and was coming out of someone else's budget.
I was working at a Research Org when the DEI push came through and it was a absolute disaster. A lot of projects ended their internship programs and avoided hiring in order to minimize the exposure. The bargain was always, you can have 6 seats but 50% need to be women and 50% need to be minorities, and since everyone got the push at the same time it meant that due to the intense competition for the same people you'd end up really having to scrape the bottom of the barrel. That made a lot of initiatives unviable.
I wasn't working at Yahoo Research but as I heard it was canned following a management rift. They were already bleeding talent for a while but had retained some good people that stayed out of comfort and inertia. The smart people cultivated in research orgs tend to be a competing source of power and management hates that.
A loss for whom? Society? Of course, and that's exactly why they don't happen anymore -- because while they were a boon for society they were a terrible bet for the company. And when a company has a choice between doing good for their bottom line or doing good for society, 100% of the time they choose their bottom line.
I mean, look at the legacy of Xerox Parc from Xerox's perspective. They invited this guy in, Steve Jobs, and he commercialized their ideas. Today Xerox is worth pennies on the dollar compared to their height, doing none of what Xerox Parc researched. Apple ate their lunch. The ROI for Xerox Parc was terrible for Xerox.
For all the amazing stuff they did, they were not rewarded by the marketplace for it, they didn't produce better products for themselves, they just did other companies' R&D.
That's where universities come in, and where they are vital. If you take them out, their role will not be filled by corporations, because corpos can't stomach the kind of dollars needed to do fundamental research. Only the government can stomach that, and if somehow the voters are convinced all this isn't worth funding, it just won't happen at any level.
> Apple was already one of the hottest tech firms in the country. Everyone in the Valley wanted a piece of it. So Jobs proposed a deal: he would allow Xerox to buy a hundred thousand shares of his company for a million dollars—its highly anticipated I.P.O. was just a year away—if PARC would “open its kimono.”
Xerox clearly undervalued the research they were producing, but it wasn't like they just gave it away entirely. Per [2] the valuation of those shares in 2018 would be $1.2 billion had they not sold them - undervalued in hindsight, but not nothing.
Xerox's lack of capitalisation was a problem of their own making, not something inherent about investing in basic research.
[1]: https://www.newyorker.com/magazine/2011/05/16/creation-myth
[2]: https://researchnarrative.com/thinkerry/the-company-that-cou...
What I said was that it worked out a lot better for Jobs than it did Xerox, not that they didn't get anything. It certainly didn't work out how they'd hoped. And that hasn't gone unnoticed by would-be funders of future Xerox PARCs.
> Xerox's lack of capitalisation was a problem of their own making, not something inherent about investing in basic research.
I dunno, to me it feels like the people who are good at doing and investing in basic research are not the same kind of people who are good at building and investing in applications. Yes you can present a counterfactual where if only Xerox had Jobs' vision and execution everything could have been different... but chalking it up to just "they could have done it better and been successful" misses the fact that they were doing the best they could with the smartest people they could find, and still couldn't capitalize.
So what you're saying here is that the best thing to come out of PARC for Xerox was an incremental improvement to their existing product line that could have been proposed by a typical R&D team.
Again, not a great selling point for the ROI of PARC from Xerox's perspective.
Laser printers were a central part of the computerized mass-customized printing of things like insurance policies and bank statements that happened in the 70's and were definitely a revolutionary change in what kind of problem Xerox was solving for their customers.
But I'm not saying laser printers weren't a great thing, I'm saying it doesn't take setting up a research playground like PARC to get that kind of result.
Laser printers are the kind of improvement typical R&D comes up with. Xerox's customers wanted more speed and quality out of their printers, laser printers got them that. It's not exactly clear that a typical R&D wouldn't/couldn't have come up with that. Apple for instance does this kind of R&D all the time, and they're very good at it.
Xerox PARC wasn't about getting the next incremental improvement in speed and quality for printers, it was about inventing the office of the future. But the office of the future doesn't require laser printers or printers of any kind. PARC's vision was that Xerox's core business would be eliminated, and that's precisely why Xerox couldn't be the one to actually capitalize on PARC research.
> were definitely a revolutionary change
I would say going from dot matrix printers to laser printers is an incremental change; whereas something more revolutionary would be going from dot matrix printers to no printers at all because you don't need them since you have e-mail and the Internet.
Parc just didn't capitalize on what they had. I know the Alto was expensive, but still seems like a huge shame.
At least in a sane world it would be.
Are you not reading the reply chains before commenting? What motivates you to interject with information that is meaningless?
The only thing I can think of is that you've voted for the people who are currently slashing the funding and have to continuously try to convince yourself it's okay.
Mankind has consistently built upon existing knowledge. "If I have seen further, it is by standing on the shoulders of giants. (Newton)"
IMHO, what we are seeing is the US was generating 50% of the world's GDP at the end of World War II. In that era it could afford to many non-economical things - Marshall Plan, funding research at universities, etc. The US is no longer the dominant economic engine. It actually has to prioritize its spending. Money spent on research is money not spent on food stamps, housing the homeless, defense.
What is never mentioned in these discussions is how much money has been spent on research that did nothing. Advanced nothing. When that is factored in, what is the ROI of university-based research?
Except for DNA, CRISPR, WWW, mRNA, the manhattan project, ARPA, GPS, etc
Prior to this, if a corporation wanted to have exclusive rights to basic patents, they'd have to run their own private research labs to generate those patents. Prior to Bayh-Dole, university inventions were patented but there were no exclusive licensing deals. This means no competitive advantage; anyone can use license the patents (I believe any US citizen) before Bayh-Dole.
So corporations largely stopped funding private research labs like Bell and instead entered into public-private partnerships; on the academic side we saw the rise of the shady enterpreneurial researcher whose business plan was to use government funds to generate patents (not uncommonly based on fraudulent research) which formed the basis of a start-up which was sold to a major corporation.
The fix is simple: patents generated with taxpayer dollars at American universities should be available to any American citizen for a small licensing fee; if people want exclusive rights to patents, they need to put up the capital for the research institution themselves, as was the case with Bell Labs. Practically, this starts with a repeal of Bayh-Dole.
I don't see why they need to own the original research.
They didn't though. Bayh-Dole was 1980. All the big tech firms have invested massively in R&D since then, and I think it's also true for many non-tech industries or tech-adjacent (e.g. chip manufacturing, oil and gas).
Now consider the choices a company makes when executives hold the Friedman doctrine as orthodoxy. Put money into basic research that might generate shareholder value in some unknown time, or buy their own stock back and pump up the price?
There are still many competing theories of business ethics, but the Friedman doctrine is what drives corporations today.
I don't understand how he became such a big name.
EDIT: Hum... Do the people downvoting have some answer?
It just saves an extra step and doesn't trigger tax event. It also makes more sense. If you prefer cash you sell it on the market to the company. If you prefer holding shares you don't do anything. You get a choice when it cash out instead of being forced to on regular basis.
The biggest reason why companies don't seek to emulate "Dupont, Bell Labs, IBM, AT&T, Xerox, Kodak, GE", is probably that it reads like a list of textbox examples of "companies that failed to execute on their research findings", so clearly there was something wrong with this approach.
The same thing will happen to Google & co.
And DuPont is very much alive doing DuPont things.
Würth is also similar. They make seemingly everything in a segment (lubrication, fuel additives, cleaning, restoration, protection, etc. etc.).
Its worked out ok for Google and others, because there's little teeth to anti monopoly, so all the big tech players can just buy the successes, which is safer than trying to grow them (esp. once the talent left). I really have no idea if this is an accurate take as its mostly vibes, sans for a few of said smart Google folks I've met in startup land(s). Yet Google is so big, they could bleed all kinds of employees telling all kinds of stories and it could all be simply random. Yet at the same time I can't help but think about every aging tech companies biggest / best products being via acquisition.
While I think monopoly is bad, I don't know if ^ otherwise is so bad. Maybe its just creative type folks _should_ avoid big tech, and build their own labs. Capital and compute are readily available to people who can demonstrate success, and its easier than ever to build and experiment in some fields. i.e. if we had stricter capital accumulation associated taxes, maybe the ills of this process wouldn't be so bad.
It's really hard to describe why it's inevitable (there are a lot of factors).
But it's self-evident really. All of the major tech players started with a single innovation that afforded them enough revenue to acquire almost everything else in their portfolio.
Aside from search, the only major product Alphabet built-in house that meaningfully moves the needle revenue-wise is their cloud segment. Youtube was acquired - and it's effectively an extension of search.
Meta had to acquire Instagram and WhatsApp. Without those acquisitions, I have strong doubts they'd still be a major player today.
You can run through this exercise with Microsoft, Apple, Amazon, NVDA etc.
The common theme is they did 1 or 2 things really well, and got big enough to acquire/copy/bully smaller players out of the market.
What's crazy is most of them still rely on that one original thing they did well for >50% of revenue.
I think there's a lot of small factors, but of those the biggest on (IMO) is the fallacy that throwing people at a problem gets it done faster. For some situations: yes, for all situations: no. And you need experience or some kind of sharp intuition to know when to expand and when not to expand.
Add more and more people to a job and they'll find ways to justify their value at the expense of efficiency. And there's a snowball effect from there as an org adds people who believe adding people is always good.
Then the corpo runs into layoffs and everyone throws their hands up and says "How could we have avoided this?" By not overhiring in the first place.
(All IMO naturally.)
LLMs are just better google. In the past, you used to google shit, and copy paste from stack overflow, now you just skip the middle man and go directly to Chat GPT. Anyone that has been programming for a while can attest to that the answers aren't any better, its just more efficient to iterate on them now.
AI hasn't even begun to be solved yet. Everyone is focused on feedforward transformer architecture that is never going to replace the imperative processing of actual intelligence.
Smartphones are pretty much solved, as they have replaced a lot of the need for in person interaction (which by extension means transportation). The last decade has been all about monetizing smartphones.
Wearables aren't transforming society at all.
3d printing and home fab is still too niche and expensive for most people, and you can't really make it cheaper and more accessible.
Electric vehicles largely suck. Self driving is mediocre.
We literally went through a pandemic and people got richer because they had to stay at home and not spend money on things like daycare or gas or car maintenance, without losing any productivity.
Hell, the state the US is in currently is largely explained by the fact that most all the problems in society have been solved to the extent that people have to invent bogeymen and elect a demented felon into office on the promise of solving those problems.
What do humans need right now to improve their lives substantially?
Machines doing dangerous jobs also is a thing these days.
High temperature superconducting can potentially be useful in a few applications that involve high current, which mostly deal with transportation. The only real advantage of this is drone delivery service becoming cheaper, but that has big hurdles to cross.
There is a reason why being a streamer is the top choice of "what I wanna be" when you ask kids. Everything is about the internet now in terms of motivation. And unfortunately there, we already hit a hard limit of the speed of light.
that doesn't sound like a very good way to improve human life on Earth.
Now maybe we could start looking at what research labs have come up with since then.
> Hell, the state the US is in currently is largely explained by the fact that most all the problems in society have been solved to the extent that people have to invent bogeymen and elect a demented felon into office on the promise of solving those problems.
That's... an interesting point. I don't really buy it, though. The same could have been said of the fascist movement in Italy, or the royalists in France in 1905.
yeah, mostly forget about computers, we're still just coming to grips with the fact that we stopped doing largely innovative work decades ago. my bet is its going to go back to being interesting pretty soon. we are having a lot of interesting discussion about cognition though :)
If it feels like there’s nothing for us engineers to research, that’s probably a sign we need more basic research from the scientists!
GE (under Jack Welch specifically) is a textbook example of how financialization and focusing on numbers at the expense of products destroys companies.
Kodak is a textbook example of disruption. Yes they failed to capitalize on digital cameras specifically, but their research in all other areas was very much acted upon.
I think the core problem is that innovators typically only capture low single digit percent of the value they generate for society.
Bell Labs existed in an anomalous environment where their monopoly allowed them to capture more of the value of R&D, so they invested more into it.
This is the typical argument for public subsidy of R&D across both public and private settings because this low capture rate means that it is underprovisioned for society's benefit.
Before Tim Cook Apple had never done a buyback - Jobs was always thinking Apple could do better with the money in R&D than paying off shareholders. Wall Street did not approve of this position, but Jobs wasn’t one to listen to anybody, so it did not matter. Most CEOs are not going to take such a strong position when they, the stockholders, and every other executive can be guaranteed a financial reward through a buyback.
That's the key phrase, they benefit all shareholders. Buybacks on the other hand only benefit the following shareholders:
1. those with regularly vesting stock options and stock grants - basically employees. For non-tech companies especially, this only means high-ranking employees
2. those who intend to sell - that is, soon-to-be-ex shareholders
3. those who borrow against their stock - typically high-net-worth individuals who own a lot of the stock
Stock buybacks are thus a non-egalitarian way to return profits. To reward all shareholders equally, pay dividends.
So it's still better for everyone since only those who need or want the income have to take it.
That only reinforces my viewpoint that buybacks advantage rich shareholders.
> your cap gains rate can vary substantially over time
It is 0% (up to like $100k for a couple filing jointly), 15% (up to about $580k), and 20% above that. Income tax has many more brackets than that and they kick in at way lower incomes.
It's true that your income can vary substantially over time. It might be nice to do earn all your capital gains and dividends in retirement. You will likely need less income then to live on and can incur $100k/year in gains and dividends tax-free. On the other hand, remaining invested in a stock that does buybacks during your working years also concentrates your risk in that stock. So people will likely sell anyway and take some capital gains to diversify.
And finally, if we want companies to improve productivity (read: fewer employees) then we can't solely tax labor to fund everything. We have to tax the part of the pie that's actually growing: this is represented by stock prices and dividends.
This really undercuts your previous argument that only certain classes of shareholders benefit from buybacks. Now you are assuming that everyone falls into one of the classes anyway.
So we're back where we started: Buybacks benefit all shareholders equally.
Long-term gains and qualified dividends (shares held longer than 60 days) are taxed at the same rate. What's the tax advantage here?
At a societal level, and I understand this is a completely different point, I also question whether it's prudent to allow tax dodging this way. We already tax labor heavily and at the same time we incentivize companies to improve productivity (read: use less labor). How do we pay for society without taxing some of the productivity (read: profits) or taxing labor even more? You can only cut so many services.
Also the reality is that its somewhat rare for retirees to spend down their entire portfolios.
I’m just not following the connections here.
It seems like your assumption is that a stock buyback is a short term gain.
One of your arguments is that the strike price for options is set based on a certain amount of stock in circulation, and decreasing that amount will “artificially” raise the stock price, making the options more valuable. I agree that higher stock price benefits those with options, and I would even agree that it is possible that when those strike prices were valued, the valuation did not take into account the possible global change in the amount of stock (although a market would have included this valuation).
I suppose the other part of the argument could be that R&D is good for the stock in the long term in a way that stock buybacks are not… the buybacks pumping up the price of the stock before it is driven into the dirt by competitors who do invest in R&D.
There, I’ve done my best for your argument but I still don’t really believe that increased stock prices for everyone is not benefiting everyone more or less equally.
My argument is a stock buyback isn't a gain for a long-term, buy-and-hold investor. Unless
a) they sell some of the stock or
b) it pays dividends
they don't see the benefit of a higher stock price or reduced share count.
Qualified dividends and long term capital gains are taxed at the same rate. So anyone who says "buybacks are more tax-advantaged" is leaving out the second part: "because you can borrow against a higher stock price without paying taxes". Since most (non-rich) people don't do that stock buybacks have the same tax (dis)advantage as dividends. If you know of a way to get tax-free money out of a higher stock price other than borrowing on margin, please tell me. I'd love to learn.
> decreasing that amount will “artificially” raise the stock price
It isn't "artificial". There are fewer shares in circulation/more demand for the shares. That legitimately translates into a higher price. But stock options and grants are generally given to employees and especially executives. So a reduced share count and higher share price is particularly good for them.
> One of your arguments is that the strike price for options is set based on a certain amount of stock in circulation
My argument was more that when employees are paid a significant portion of their compensation in stock they tend to sell much of it upon vest (sensibly) in order to diversify or even just to pay their bills. Ergo, being frequent sellers, they benefit from the higher stock price more than they would from regular dividend payments. A higher stock price directly translates into higher compensation. Wouldn't this be a powerful incentive for company management to prefer buybacks over dividends?
> I suppose the other part of the argument could be that R&D is good for the stock in the long term
I didn't say anything about R&D spending. A company should return as much profit to shareholders as it sees fit.
I was rebutting the common, I believe simple-minded, argument that buybacks and dividends are completely equivalent. Even though the company spends the same amount of money, I think they are different in some very significant ways.
Buybacks can be good or bad for shareholders, depending on the buyback price.
Example. I take $1000 and securitize it as 1000 shares. The company sells the shares for $1 each. This is a no-fee closed fund, whatever. I'm the "CEO". I personally buy 1 share.
Anyway, one day the stock trades at $0.90 and the company buys back 500 shares at that price. (How $0.90? Maybe the largest shareholder was distressed and needed cash, maybe somebody didn't read the SEC filings. Maybe "the ticker tells the whole story" and the ticker told $0.90 for a few days. It doesn't matter.) Now the company holds $550 and has 500 shares outstanding. Each share owns $1.10 of USD. Expenses are zero. I kindly volunteer my services as CEO and sole employee.
Pretty soon the stock might trade around $1.10. (Why $1.10? wHo knows?) The people who sold for $0.90 might regret that decision now. Continuing shareholders make money if they sell now. Was this "good for shareholders"? Depends on which shareholder.
Now I (the CEO) decide the company will do a buyback. The company offers $2 a share. I sell my own share for $2. To make it simple, say the company buys back 275 shares at $2. Now it's broke. The remaining shares trade for ... whatever. Somewhere between $3 and $0? ($3 because growth rate!)
I personally doubled my investment. Anybody who sold at $2 also did well.
Buybacks can be good or bad for shareholders.
Share buybacks are always executed at the current market price. The company doesn't offer a higher price. A large buyback order might move the share price up a tiny bit but triggering an increase from $1 to $2 is impossible for any company traded on a major US exchange.
I'm not claiming the price jumped from $1.10 to $2 without hitting any intermediate prices. That's your idea.
But yes, of course it's a toy example. I should probably have made the buybacks drive the price from $1.10 to $1.20 or something, with a much smaller reward for the founder & CEO. I got bored and kept it simple. (Or I got greedy for that $1 profit, maybe.)
All the working parts of the example are on display. You can make other examples that seem better to you.
If they're continually investing/rebalancing then it benefits them the same way a dividend does, but with fewer tax consequences.
It's better for me as a long term investor because I can better control my tax liability. It also allows for long term growth without a tax drag until I'm ready to switch out of my accumulation phase.
I already said that buybacks benefit sellers.
> share based M&A or compensation
All fair points. Share-based M&A can be good for investors. But if the stock price is going up because the company spent money on buybacks, then the company could also just pay cash for M&A and skip the buybacks.
Higher compensation is good for employees who get paid stock and for upper management, who are nearly always paid largely in stock. There's an argument that's good for shareholders because of better retention. But if that were the case, why not just pay employees more cash?
Paying cash could be quite different than paying in shares for M&A.
If owning/using shares makes no difference to cash (whether to employees or in M&A situations), why not do buybacks then if there is no difference between cash and shares anyway?
I'm confident I share that psychology with almost everyone.
Well, "don't sell" is the wrong strategy anyway. Trade it in for an index fund.
Or if you're a multimillionaire: https://www.bloomberg.com/news/features/2025-07-21/how-rich-...
Borrowing against stock is mostly something for HNW people.
> shareeholders benefit from reduced share count because it increases their claim on future profits
So...dividends? Or when they eventually sell? What if I never want to sell?
At least if your broker offers decent margin rates or you sell boxes.
Well, also, your 401k and IRAs are probably superior to this strategy and can't be used as collateral as they're protected in bankruptcy. So it's not worth it until you fill those up.
But it's way riskier.
> At least if your broker offers decent margin rates
I guarantee you no retail broker will give you the rates Elon's broker gives him.
> you sell boxes
I have to guess you mean "box spreads". This is an advanced strategy and again more likely used by HNW people.
A: Hold $10 of stock. Buyback of 1$ per share. You're left with $10 of stock. B: Hold $10 of stock. Dividend of 1$ per share. You're left with 9$ of stock and $1 cash - taxes payed. Once reinvested you have $9 + (1 * tax rate) in stock.
You're making two mistakes: One is thinking that dividends are magic money that do not cause share prices to fall in exact accordance with the distribution and the other is that buybacks lift the share price somehow (they do not, see Modigliani-Miller).
A stock buyback rewards all stockholders equally. Those who sell, get their reward in cash. Those who do not sell, get their reward in the proportion of their ownership of the company going up.
If the buybacks are at a discount to whatever the stock turns out to have been worth at the time, then that benefits all the shareholders. That can be a great use of money for all shareholders.
But buybacks at inflated prices benefit only exiting shareholders. Exiting shareholders tend to include hired management. Of course nobody really knows the valuation that well, so obviously there's a guessing game.
This is pretty hard to argue against for anybody who agrees that valuation is a thing at all.
Buybacks increase the share price because you have a company that is worth (for sake of argument) the same as it was worth before, except now there are fewer shares available.
A fixed market cap divided by fewer shares equals a higher share price.
In the limit case imagine buying back all but 1 share. Now that 1 share represents the entire value of the company, so the share price would equal the market cap.
Markets tend to reward companies that use buybacks as there is a belief the buybacks are a demonstration of discipline by the management team. Conceptually COMPANIES SHOULD BUY BACK STOCK IF THEY DO NOT HAVE BETTER ROI PROJECTS IN THE PIPELINE. This frequently happens in mature industries.
As noted above, buybacks are another means to return cash to investors. Today, in the US, the tax rate on qualified dividends and long-term capital gains are equivalent for most shareholders. This has not always been the case. When tax rates for capital gains are lower than dividends, buybacks are a more efficient means to return capital to investors.
Buybacks also allow for more tax planning. When dividends are issued, the investors have to pay taxes on them at that time. Stock buybacks allow investors to choose when they want to pay taxes. They can sell into the buyback and pay taxes now or hold the stock and pay taxes at a later time.
Buybacks are can be part of normal corporate capitalization decisions - what is the appropriate debt to equity ratio for the company.
Finally, changing dividend levels has its own impact on stock price. If a company increases its dividend, them market expects it to remain increased. In this case the stock price goes up as investors expect more dividends in the future. When a company cuts its dividend (rare event), the stock price drops dramatically as the market punishes company not only for the reduced expectation of future dividends but also because companies only cut dividends when they are having severe problems. Some companines issue a special dividend related to a one-time event such as selling a division. The stock price does not do much in these events.
All of this is to say that stock buybacks are not why corporations reduced basic research investment. I was at GE watching the famous research centers getting cut. The bottom line was the research coming out of the centers was not creating a meaningful ROI. At one point the researchers went to the various GE businesses looking for projects where their expertise could add value - an internal consulting group. They gave up after a year as there was so little success. Corporate research centers are expensive. They need to earn their keep.
Sell the stock then use the gains to buy the stock? I'm very confused by this.
> without having to first pay tax for the dividend
Long term capital gains and dividends are taxed at the same rate. The only tax-free way to benefit from a higher share price (that I know of) is to borrow against it.
> get their reward in the proportion of their ownership of the company going up.
Which only matters if the company pays dividends, or the shareholders eventually sell.
Now assume I am a long-term investor, who invested money into a company, and wants to keep all that money in the company, instead of taking money out.
If the company pays a dividend, I can put the money they paid me back into the company, but I have to pay capital income tax on the money in between. If they buy back some stock, I have essentially fully reinvested my money to grow my share of ownership in that company, but I have not paid any tax on this, and will only have to do so at the end. As I get to grow compound interest on my money, I will come out much better in the long term.
> As I get to grow compound interest on my money, I will come out much better in the long term.
You will pay the capital gains tax rate either way. Either when you buy 15% less additional shares, or when you sell them at the end and pay the 15% then.
If you start with 15% less and compound it, you still end with 15% less.
(15% is just an example)
You might be placing a bet that at some point in the future there will be a reduction the capital gains rate, but, as far as I can see, you are not earning more due to compounding.
This is incorrect. If the company buys back say $100m worth of its stock, it's true that the individual shares remaining represent a larger fraction of the company, BUT the company itself is worth $100m less after the transaction (because it has spent that $100m on purchase of something that can't be added to the balance sheet - basically incinerated that money from company's point of view, similarly to how paying out dividends is "destroying" money). These two factors cancel out perfectly, and the book value per share remains unchanged.
I'm upvoting because you're advancing the discussion for sure.
Buybacks of overpriced stocks also do not benefit investors.
Stock grants can actually include dividends.
Even if you don't sell or borrow against it you benefit because you don't have that tax liability, and the money you woulda paid in taxes can continue to be invested.
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