Pay attention if companies spend more on buybacks than research and development.
Technology stocks have led the market this year, helped by share buybacks, but there are red flags for some of the companies.
In fairness, if we look back over the past 12 reported months, Intel’s $13.4 billion in R&D spending exceeded its $12.4 billion in share buybacks. But what did that $12.4 billion do for investors? Intel’s stock was up 25% for the 12 months through Nov. 29, with dividends reinvested. That’s great, but it trails the S&P 500 SPX, -0.66% information-technology sector’s return of 33%. Over the same period, Intel’s smaller rival Advanced Micro Devices AMD, +0.44% saw its stock return 83%, with no money spent on share buybacks. AMD’s third-quarter sales were up 9% from a year earlier, while its net income was up 18%. AMD’s third-quarter gross margin expanded to 43.1% from 40%.
Broadcom As you can see on the third table below, Broadcom’s AVGO, -1.35% spending on buybacks for the past 12 reported months totaled $7.35 billion, while its R&D spending was $4.47 billion. This is a red flag that warrants a closer look. The buybacks can be lumpy — $3.51 billion in buybacks took place during the company’s fiscal first quarter ended Feb. 3.
The company had $34.03 billion in long-term debt as of Aug. 4 , up from $17.49 billion a year earlier. So our first group is 31 companies whose R&D spending exceeded buyback spending for the most recent quarter and over the past 12 months. The second group is companies whose buyback spending exceeded R&D spending for either the most recent quarter or the past 12 months.
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