Cash Management

Is R&D Getting Too Little Respect?

When it comes to making best use of corporate revenues, stock buybacks and dividends seem to be more in favor.
Stephen TaubOctober 17, 2005

Companies that make up the Standard & Poor’s 500 increased their spending on research and development by just 3.3 percent over the past four quarters while revenue grew 11.6 percent, reported USA Today. As a percentage of revenue, the newspaper added, companies spent slightly less on R&D in the second quarter than they did a year earlier.

Companies found other ways to use that cash, noted the paper, citing S&P analyst Howard Silverblatt: stock buybacks surged 92 percent, and dividend growth topped 13 percent.

Companies may be shying away from spending on research and development, speculates the paper, because they want to remain on the good side of investors. According to Jim Paulsen, strategist at Wells Capital Management, investors and executives alike fear that R&D spending is “being thrown down a rat hole.”

Indeed, last week we reported that a Booz Allen Hamilton analysis of the 1,000 companies worldwide with the highest R&D spending in 2004 found no discernable link between spending levels and nearly all measures of business success, including growth, profitability, and shareholder return. The only statistical relationship that Booz Allen identified was that R&D spending appears to yield better gross margins.

Paulson, however, reportedly argued that the consulting firm’s conclusions should be discounted because it began measuring the effectiveness of R&D spending six years ago, at its peak, just when the economy was starting to wither. The results would be just the opposite, he added, if one were to examine the yield of R&D spending beginning 30 or 40 years ago.

“Unless [the economic] recovery dies on its own, at some point, companies will say maybe this is OK” to spend on R&D, Paulson told the paper.