Companies have different ways on how they approach spending on research and development, and that difference can also explain their success or struggle in business and as CNBC’s Dominic Chu pointed out, The Dow Chemical Company (NYSE:DOW) is one of those strategic R&D spenders. He looked at Dow Chemical and E I Du Pont De Nemours And Co (NYSE:DD), which are giant players in the chemical segment with significant spending on development of next generation products.
According to Chu, companies that spend more on R&D also almost without exception offer better returns to shareholders. He quoted findings of CNBC’s partner, Prof. Anne Marie Knott of Washington University in St. Louis, who looked at how sales relate with R&D spending and arrived at what is known as research quotient or RQ.
“Here is what it comes down to: research and development, R&D, many would consider the lifespan of the company in the future and its continued success. Now, spending on innovation and ideas for the next generation products is key and can often lead to better stock returns and as with everything some companies do R&D better than others,” said Chu.
Looking at a report, Chu showed that E I Du Pont De Nemours And Co (NYSE:DD) spent $2.1 billion on research last year, which was 6% of its revenue. Its RQ in the year was 98.9%.
“According to Prof. Knott’s calculations a 10% boost in E I Du Pont De Nemours And Co (NYSE:DD)’s R&D spending could lead to about $366 million boost in overall sales,” he said.
Concerning The Dow Chemical Company (NYSE:DOW), Chu said that the company spent $1.75 billion on R&D last year, which was 3% of its revenue in the year. That gave it RQ of 104.1%. He said that The Dow Chemical Company (NYSE:DOW) could realize a $741 million boost in its sales by boosting its R&D by 10%.
“About eight years ago Dow actually hired a new VP for R&D who diversified all its staff scientists and brought in new technology to speed up the pace of innovation,” said Chu, who also noted that recently activist investor Dan Loeb of Third Point also targeted The Dow Chemical Company (NYSE:DOW), which some say helped to shape some of the stock’s gains.