🚨 (How to Create a Modern Version of Siegel's Theory) The Truth Behind the 'Unease' I Felt with the Investment Bible.
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Hello, this is Kato-chan.
When you start investing in US stocks, there is a classic book that is almost always recommended: Dr. Jeremy Siegel's "Stocks for the Long Run".
There are many voices saying, "I was moved after reading this!" or "It's the investment bible!", and I actually picked it up and read it myself. However, to be frank... I felt a strong sense of unease, thinking, "This doesn't really resonate with the current market."
What about the old-economy companies like ExxonMobil that Dr. Siegel once praised, or the strategy of reinvesting in high-dividend stocks? Can that really still be effective today, when giant tech companies are driving the market?
In this article, I will unravel "what parts of Siegel's theory still hold true today and what parts need to be revised for the modern era," from the perspective of following SEC filings (such as 10-K and 10-Q) and the front lines of cash flow.
The one essential truth that 'holds true' even as times change
In conclusion, it is not that Siegel's theory is completely wrong. The core of his theory, "a long-term perspective and the power of compound interest," remains the most powerful weapon in investing even today.
Without being swayed by short-term noise, reinvesting the profits generated by companies and expanding assets like a snowball—this mathematical advantage is an absolute truth for overcoming inflation and building wealth.
However, the problem lies in the fact that the "means (the vehicle) for making compound interest work" has changed completely since Dr. Siegel's time.
Why does it 'not resonate'? The shift from income to capital
Synonymous with Siegel's theory is "investing in high-dividend stocks and reinvesting dividends." However, if you apply this theory as-is to the modern US market, you may fall into a "trap" that lacks growth potential.
This is because powerful modern companies (especially tech companies) have shifted shareholder returns from "dividends" to "stock buybacks."
This "change in the protagonist of returns" is obvious when looking at the actual data of S&P 500 companies.
The 'reversal phenomenon of shareholder returns' seen from primary sources
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[Past] 1994 (A representative example of the era that formed the basis of Siegel's theory)
Total dividends: approximately $93.1 billion
Total stock buybacks: approximately $38.4 billion
Fact: At that time, "dividends" were the overwhelming protagonist, at about 2.4 times the amount of "stock buybacks."
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[Present] 2024 (The most recent 1-year period ending September 2024)
Total dividends: approximately $616.2 billion
Total stock buybacks: approximately $918.4 billion
Fact: Currently, "stock buybacks" have surpassed dividends and are being conducted at a scale of about 1.5 times (approximately 140 trillion yen scale).
For example, looking at the return amounts of S&P 500 companies in the past (as of 1994), which formed the basis of Dr. Siegel's theory, dividends were approximately $93.1 billion, while stock buybacks were approximately $38.4 billion. At that time, "dividends" were overwhelmingly the protagonist.
But what about now (the most recent 2024 aggregated data)? While the total dividends of S&P 500 companies are approximately $616.2 billion, the total amount of stock buybacks has ballooned to approximately $918.4 billion.
Now that stock buybacks have overwhelmingly surpassed dividends on a dollar basis, it is impossible to deny that evaluating companies solely by 'dividend yield' is outdated. Dividends are taxed every time they are received, but with stock buybacks, the company collects and retires its own shares from the market, which automatically boosts the value per share (EPS). Investors can receive the 'benefits of compounding' in an efficient, pre-tax state without doing anything at all.
However, looking at the data this way, sharp observers might notice one fact. 'Wait? Even though stock buybacks have become overwhelming, dividends themselves have also skyrocketed by about 6.6 times (from $93.1 billion to $616.2 billion) since Dr. Siegel's era, haven't they? If so, wouldn't dividend-focused investing still yield sufficient profits?'
That perspective is absolutely correct. Because the earning power of U.S. companies as a whole has been raised, the power of income gains from dividends remains robust even today.
However, a modern 'trap' lurks here. While the absolute amount of dividends has increased, the stock prices of U.S. companies as a whole have grown even more explosively, causing the 'dividend yield' of the entire market to fall from its former level of about 2.8% to about 1.3% today.
In other words, what happens if we screen for stocks in the modern era using only 'high dividend yield' as we did in Dr. Siegel's time? The risk increases that you will only end up with mature industries lacking growth potential or stocks that are simply languishing due to poor performance (value traps). Above all, it leads to an opportunity cost where you completely miss out on the 'overwhelming growth benefits' of the giant tech companies that are driving the current market and aggressively boosting EPS through stock buybacks.
That is why, when we look at financial statements (such as 10-Ks and 10-Qs) today, the question we should ask is not just 'What is the dividend yield percentage?' It is, 'Are they generating enough operating cash flow to continuously increase shareholder value as a 'total return' that combines dividends (income) and stock buybacks (capital)?'
In short, in the modern U.S. stock market, the protagonist of the returns that shareholders receive has clearly shifted from 'income gains via dividends' to 'capital gains via stock buybacks (EPS improvement and stock price appreciation).' Recognizing this paradigm shift correctly is the first step toward surviving in the modern market without being bound by classical theories.
Past Great Stocks vs. Modern Protagonists: How Has the Analytical Approach Changed?
To make this shift clearer, let's compare the group of stocks recommended by Dr. Siegel with the group of modern stocks I currently analyze through documents like 10-Ks and 10-Qs.
[Past: Analytical Approach to Siegel Stocks]
Representative stocks: ExxonMobil, Philip Morris, Coca-Cola, etc.
Focus of analysis: Stable dividend yield and the 'unchanging demand' for consumer staples.
Characteristics: While requiring massive capital investment, the logic is that by continuing to reinvest the 'high dividend yield' generated from their solid profits, they outperform the market average over the long term.
[Present: Analytical Approach to Modern Protagonists (Tech Companies, etc.)]
Representative stocks: Giant high-tech companies like NVIDIA, high-profit companies based on intangible assets.
Focus of analysis: Overwhelming ability to generate operating cash flow and the power to channel it into both 'company growth' and 'stock buybacks'.
Characteristics: Modern top-tier companies use 'asset-light management,' leaving massive profits as cash on hand. As you can see from their cash flow statements, they are not just using that abundant capital for stock buybacks. They are investing heavily (going all-in) in 'company growth,' such as building AI infrastructure, to ensure their survival. This is because if the company itself does not grow, true capital gains (stock price appreciation) cannot be created. On top of that, they execute aggressive stock buybacks, directly increasing shareholder value.
That is why, when we look at financial statements today, the question we should ask is not 'What is the dividend yield percentage?' It is, 'How powerfully are they pouring the massive 'operating cash flow' they have generated into both self-investment for their own growth (AI infrastructure, etc.) and stock buybacks?'
Conclusion: Reinstalling Siegel's Theory into the 'Modern OS'
Let's return to the question at the beginning. Does Jeremy Siegel's theory still hold up today?
The answer is both 'Yes' and 'No'.
The superficial approach that 'reinvesting in dividend stocks is the only correct answer' (No) is already out of sync with modern capital structures. However, the fundamental philosophy of 'leveraging compound interest and committing to corporate growth with a long-term perspective' (Yes) remains completely unshaken even today.
What we must do is keep only the wonderful 'essence' of Siegel's theory and reinstall it into a 'modern OS' characterized by share buybacks and the overwhelming capital efficiency of intangible assets.
Rather than just swallowing past classics whole, we should cross-reference them with SEC filings and raw financial data, updating them with our own thinking. I believe that is the path to capturing truly valuable returns in today's information-saturated US stock market.
Moving forward, I will continue to use this note to share the 'real state of companies' as deciphered from primary sources (such as 10-Ks and 10-Qs), rather than being bound by 'superficial theories'.
Thank you for reading until the end.
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(Disclaimer: This text is for informational purposes only and does not constitute solicitation for specific stocks, investment advice, or a guarantee of the completeness of financial analysis. Investing involves risk. Please always make final investment decisions at your own responsibility.)
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