Research and Development Up Despite Stock Buybacks

Corporations have been purchasing record amounts of their own shares in recent years. This has boosted earnings per share and returned income to shareholders, but not everyone thinks that’s a good thing. As the trend intensifies, stock-buybacks are a hot topic in the news.

According to Yardeni Research, stock buybacks by the S&P 500 have topped $2.1 trillion since the beginning of Q1 2009. Nearly $200 million was authorized in February 2015 alone. With such a significant sum going towards these buybacks, many stakeholders are questioning whether companies are skimping on investment in order to fund these programs.

As Euro Pacific Capital’s Peter Schiff recently said, “Money spent on buybacks is not available to purchase new plant and equipment, to fund research and development, or to spend on marketing and logistics. In that sense, buyback spending generates current earnings at the expense of future earnings.”

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Our research, however, shows that research & development (R&D) expenditures have not taken a significant downturn. In fact, among the S&P 500, R&D expenditures have increased at a reasonable clip over the past five years.1

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Since 2010, the average R&D expenditure by the S&P 500 has increased 32%, from $892 million to $1,177 million. Aside from 2013, when total R&D decreased 1% and the average barely increased, it hardly seems like companies are skimping on investment in research and development.

Further, the ratio of R&D expense to sales shows that investment in research and development hasn’t much fallen behind the overall growth in these companies.

When considered as a percentage of sales, we do see a significant decrease from 2010 to 2011, but the trend reverses the following year. Since then, the ratio has increased about 14%, regaining nearly half of the downturn from 2010 to 2011.

In the end, it seems that stock-buybacks have not come at the expense of investment, at least in research and development.2


1. For the sake of comparability, we narrowed our population down to the S&P 500 companies that were listed in the index for all of 2011-2015, for a total population of 488 companies.
2. While not necessarily germane to this discussion, it’s interesting to note that there’s evidence that R&D companies have lower effective tax rates.