Buybacks vs R&D

Extracted Attributes

• Definition

  A debate concerning whether companies should prioritize returning capital to shareholders through stock buybacks or investing in long-term innovation via Research and Development (R&D).

• Core Criticism

  Excessive buybacks may hinder long-term innovation, divert funds from growth-driving R&D, and trade future growth potential for present-day stock price gains.

• Related Corporate Philosophy

  Shareholder primacy (maximizing shareholder value) versus prioritizing long-term investment and innovation.

• Supporting Argument (Critics)

  Research by Mike Fisher and Swift found a significant negative correlation between stock buybacks and corporate innovation, as measured by R&D expenditure and patents produced.

• Alternative Capital Allocation

  Capital expenditure (Capex), dividends, and direct investment in R&D.

• Counter Argument (Proponents/Context)

  Companies may use buybacks when demand for products is insufficient to justify R&D, when shares are undervalued, or to return value to shareholders. J.P. Morgan data suggests US corporate R&D spending as a percentage of GDP has been rising over the past decade, and the number of patents awarded has tripled over the past 25 years, even with high buyback announcements.

Timeline

• Regulation regarding share buybacks in the US changed, allowing for their increased use. (Source: Web Search Results)

  1982-XX-XX

• Since this year, IBM spent $125 billion on buybacks and $32 billion on dividends, compared to $111 billion on capital spending and R&D. (Source: Web Search Results)

  2005-XX-XX

• The absolute dollar value of buyback announcements in the US reached a record $939 billion. (Source: Web Search Results)

  2018-XX-XX

• Shell spent $14.5 billion on share buybacks in the first three quarters, in addition to $5.6 billion in dividends, compared to approximately $10 billion on 'lower-emission' energy solutions. (Source: Web Search Results)

  2022-XX-XX

• Over the past decade, U.S. corporate R&D spending as a percentage of GDP has been rising. (Source: Web Search Results)

  XXXX-XX-XX

• Over the past 25 years, the number of patents awarded in the US has tripled. (Source: Web Search Results)

  XXXX-XX-XX

Free cash flow to equity

In corporate finance, free cash flow to equity (FCFE) is a metric of how much cash can be distributed to the equity shareholders of the company as dividends or stock buybacks—after all expenses, reinvestments, and debt repayments are taken care of. It is also referred to as the levered free cash flow or the flow to equity (FTE). Whereas dividends are the cash flows actually paid to shareholders, the FCFE is the cash flow simply available to shareholders. The FCFE is usually calculated as a part of DCF or LBO modelling and valuation.

Web Search Results

• Revisiting Stock Buybacks - by Mike Fisher - Fish Food for Thought

  Swift’s findings provide empirical support for a broader concern, that excessive buybacks do not merely substitute R&D; they may actively hinder innovation. When companies prioritize buybacks over investments that foster long-term value, like research, product development, and infrastructure, they’re essentially trading future growth potential for present-day stock price gains. This shift creates a troubling dynamic. Executives, rewarded primarily on share price performance, are incentivized to [...] linked to stock performance. Critics argue that by prioritizing buybacks, companies may divert funds from potentially growth-driving R&D investments, thus compromising long-term innovation. Swift analyzed data from 682 firms finding a significant negative correlation between stock buybacks and the levels of corporate innovation as measured by R&D expenditure and patents produced. [...] Stock buybacks are a complex financial tool that, when used judiciously, can benefit shareholders by offsetting stock-based compensation and modestly returning value. However, the widespread and often excessive use of buybacks raises significant questions about their broader impact on innovation, long-term investment, and market fairness. As highlighted by research and historical perspectives, buybacks can suppress investments in R&D and create misleading financial optics, prioritizing

• Corporate America's buyback binge feeds investors ... - Reuters

  Companies say buybacks are warranted when demand for their products and services isn’t enough to justify spending on R&D, or when they deem their shares to be undervalued, and therefore a better investment than new projects. [...] IBM Corp has spent $125 billion on buybacks since 2005, and $32 billion on dividends, more than its $111 billion in capital spending and R&D during the same period. Pharmaceuticals maker Pfizer Inc spent $139 billion on buybacks and dividends in the past decade, compared to $82 billion on R&D and $18 billion in capital spending. 3M Co, creator of the Post-it Note and Scotch Tape, spent $48 billion on buybacks and dividends, compared to $16 billion on R&D and $14 billion in capital spending. [...] At Thomson Reuters Corp, owner of Reuters News, capital spending last year totaled $968 million, more than half of which went toward R&D, according to the company’s annual report. Buybacks and dividends for the year were more than double that figure, at a combined $2.05 billion. The company had 53,000 full-time employees last year, down from 60,500 in 2011. So far this year, capital spending is at $743 million, while buybacks and dividends total $2.02 billion.

• Stock buybacks: Is excess cash being spent wisely? - J.P. Morgan

  Critics of buybacks have argued they reduce long-term shareholder value because the money used to fund buybacks could instead be used on profitable investments, such as research and development (R&D) and increasing worker productivity. But companies actually increased investment in capital expenditure (capex) by 16% (or $99 billion) and boosted dividends by 9% ($38 billion) during 2018, when the absolute dollar value of buyback announcements reached a record $939 billion, according to [...] J.P.Morgan data. U.S. corporate R&D spending as a percentage of GDP has also been rising over the past decade and number of patents awarded (a measure of R&D output prowess) has tripled over the past 25 years. [...] One major critique of buybacks is connected to what the purpose or duty of a publicly-traded company is seen to be, fitting into the larger ideological debate about the benefits and drawbacks of capitalism. On one side, the pro-buyback camp follows the theory of “shareholder primacy,” which argues that a firm’s executives and directors should maximize “shareholder value” as measured by share price. On the other side, many of the anti-buyback camp’s critiques stem from the view that companies

• The influence of share buybacks on ill-health and health inequity

  To address the aims of the paper, we adopted a synthesis research design using multiple methods, involving descriptive analysis of quantitative data and document analysis of corporate reports and grey literature materials. We began with a descriptive analysis of annual share buyback expenditure, which was compared to data on dividends, net income, capital expenditure, and research and development expenditure, for corporations listed on US stock exchanges between 1982 (the year that regulation [...] with US$243 billion in dividends, compared to around US$10 billion in research, development, and implementation of so-called ‘lower-emission’ energy solutions . For 2022 and beyond, the same four corporations have made larger commitments to share buybacks and dividends than to investing in renewable and low carbon energy (as reported) (Table 1). After generating record profits, Shell, for instance, spent US$14.5 billion on share buybacks in the first three quarters of 2022 (on top of US$5.6 [...] capital, research and development expenditure (a proxy for actual long-term investment). As previously highlighted, share buybacks were a major contributor to this trend.

• Real effects of share repurchases legalization on corporate behaviors

  repurchase more shares to raise total payouts. When more capital resources are used to buy back shares, fewer are allocated to capital expenditures and R&D, resulting in lower investments.