Reply #68: Cutback in R&D spending raises red flag [View All]

[54anickel]

Didn't we just read the other day that R&D beyond the minimum was a waste of resources and offered no return on investment?

http://www.usatoday.com/money/companies/management/2005-10-12-randd-usat_x.htm

Are companies squandering the future keeping their shareholders happy?

While third-quarter corporate profits, being reported now, are expected to soar an additional 15% compared with the year-ago quarter, companies are shoveling much of their fat cash flows back to investors through dividends and share buybacks. In the process, research and development, better known as R&D, is being ignored.

Companies spent slightly less on R&D as a percentage of revenue in the second quarter than they did a year ago, according to a USA TODAY analysis of Capital IQ data, looking at members of the Standard & Poor's 1500 index. Spending on R&D by companies in the benchmark S&P 500 index has grown 3.3% over the past four quarters, well below the 11.6% growth in revenue during the same period, S&P says.

Meanwhile, the dollar value of stock buybacks and dividends, two ways to return cash to shareholders, jumped 92% and 13%, respectively, in the second quarter, says Howard Silverblatt, market analyst at S&P.

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One reason companies are R&D averse: They fear investor retribution. In a reversal from the late 1990s, when dividends were dissed and companies couldn't spend enough on R&D, investors now want executives to return cash to them, says Jim Paulsen, strategist at Wells Capital Management. Investors and executives fear R&D spending is "being thrown down a rat hole," Paulsen says.

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