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Share buybacks: an attack on R&D

Engagement Manager

Share buybacks are one of the reasons for the inflated valuations currently in the market, meanwhile R&D spending has stagnated.

2021 was a record year for share buybacks with the total buyback volume on the S&P 500 at a record $850 billion and predicted to go above $1 trillion in 2022. It is not just the headline-grabbing buybacks of the Big Five that are creating artificial demand. Utilities, conglomerates, banks and supermajors are all getting in on the act to increase the underlying share price and earnings per share. This is a get-rich-quick scheme and given the existential threat that climate change poses to business operations and the bottom line, is not prudent behaviour.

So how does a company protect its competitive position and guarantee long-term value in a rapidly changing world? The only way that has ever worked in the long run. Innovate. Innovation can take many shapes - changing business models, changing internal operations - but the area that can reap the greatest returns for larger corporations is investments in R&D. Some sectors are better than others, with pharmaceuticals, medical devices and technology companies generally leading the way in R&D spend as a proportion of profits. The poorest performers are often utilities, supermajors, chemical and agriculture sectors. Even the best performers in pharmaceuticals however have spent more on buybacks in the last ten years than they have on R&D as outlined in numerous works by INSEAD professor Robert Ayres.

Given the ongoing changes in the energy system, the lag in spending by utilities and supermajors is not only detrimental to the carbon-free transition, but also the company’s long-term value. Instead of taking advantage of the pools of cheap money available in the global financial system in the last ten years to future-proof and broaden the technical capacity of businesses, M&As and buybacks have been the name of the day. Engaging in this frivolous behaviour indicates a lack of imagination, and weak strategy and is an act of corporate vandalism.