24/7 Wall St.

Big companies often invest in research and development to promote growth and profitability. Yet this expense can sometimes be a waste. For every Intel or Merck, which invests wisely, there is an AMD or HP, which does not. Of the 50 American companies that spend the most on research and development (R&D), five lose money, and the net margin of another 15 is less than 10%.

The effectiveness of R&D spending can be measured in several ways. One is the number of patents filed each year. However, patents do not always produce revenue in and of themselves. IBM filed the most patents in the United States last year, while Apple filed only a fraction of that. Notwithstanding recent developments, Apple has been the more successful of the two by far over the past decade.

Many of the companies wasting the most on R&D are shrinking. One of the best examples is chip maker Advanced Micro Devices. Despite large, ongoing investments in R&D, its revenue has faltered for years, and it often has lost money during this time. AMD continues to make no progress against its primary rival, Intel.

When a company is losing money, particularly if it has a history of losses and minuscule profit margins, that’s a red flag it is not spending its R&D investment wisely.

Outside attempts to change management are often a sign Wall Street believes a company is making poor R&D investments. After accumulating a large position in Forest Labs, Carl Icahn forced the company to add one of his representatives to the company’s board. HP has gone through a series of management and board changes due to broad investor dissatisfaction. Michael Dell, the largest shareholder of Dell, recently offered to buy the entire company, to remove possible shareholder influence.

Some would argue that a company struggling to grow its business actually should spend more money on R&D. HP could spend a lot more on R&D. At just 2.8%, the company spends a tiny portion of its overall revenue. However, almost none of the money spent on R&D in the past has helped it move beyond its unsuccessful legacy businesses, such as PCs and printers, and into the growing market of tablets and smartphones.

To identify the companies wasting the most money, 24/7 Wall St. reviewed the 50 companies on the S&P 500 that spent the most on R&D in fiscal 2012. To reflect the extent to which companies were investing their money poorly, companies with the biggest R&D budgets also had to have net margins of less than 3%.

These are America’s most wasteful companies.

8. Dell
> Net profit margin: 3%
> Net income: $1.9 billion
> R&D spending: $1.2 billion
> Industry: Computer hardware

Dell Inc. (NYSE: DELL) may be bought out by founder Michael Dell and institutional investor Silver Lake Partners. However, their efforts have been challenged by Carl Icahn and Southeastern Asset Management — Dell’s largest outside investors. Whichever group wins, it gets a dying business. The company’s most recent earnings are evidence of that. Perhaps more important, a special committee of Dell’s board argued the company should be sold because of the challenges to its future success.

7. Electronic Arts
> Net profit margin: 3%
> Net income: $98 million
> R&D spending: $1.2 billion
> Industry: Video games

Electronic Arts Inc. (NASDAQ: EA) was once considered the king of the video game industry. But in recent years popular game consoles have aged, and many casual fans have migrated to games on tablets and smartphones. The company’s CEO recently resigned a few weeks ahead of a dismal earnings report. Revenue and net income both dropped in the most recent quarter. Specifically, revenue fell from $4.1 billion in fiscal 2012 to $3.8 billion in fiscal 2013. Some good news may be on the horizon. The company has ramped up spending in order to be prepared for the next generation of consoles being released by Microsoft and Sony later this year.

6. Dow Chemical
> Net profit margin: 2%
> Net income: $1.3 billion
> R&D spending: $1.7 billion
> Industry: Chemicals

Dow Chemical Co. (NYSE: DOW) has been accused of aggressive global expansion in some business sectors that are highly cyclical and also subject to commoditized pricing. In its most recently reported quarter, Dow’s revenue fell 2% to $14.4 billion. Despite this drop, the company reported, “Research and Development (R&D) expenses were up 7 percent versus the same period last year, reflecting continued investments in Dow’s technology-driven segments, particularly Agricultural Sciences.” In its most recent quarter, the Agricultural Sciences segment was the company’s only business in which sales grew considerably from the year before. Unfortunately for investors, Dow also said it did not expect any significant improvement in its revenue this year and has voiced its worry about the global economy.

5. Amazon.com
> Net profit margin: 0%
> Net income: -$87 million
> R&D spending: $5.0 billion
> Industry: Online retail

Amazon.com Inc. (NASDAQ: AMZN) is rarely criticized by Wall Street, but when it is, the core of the argument is that it spends too much money on R&D to drive future growth of its revenue and product lines. Many of these investments have yet to bear much fruit, particularly its expensive Amazon Web Services, which is given to some customers for free. Its Kindle products may lose money also, according to some industry analysts who say the total cost of the components, R&D and marketing likely exceeds the Kindle HD’s $200 price tag.

4. Forest Laboratories
> Net profit margin: -1%
> Net income: -$32 million
> R&D spending: $964 million
> Industry: Drug manufacturer

Forest Laboratories Inc. (NYSE: FRX) recently avoided yet another proxy fight with billionaire investor and corporate raider, Carl Icahn, by adding one of his representatives to its board. Forest Lab’s 85-year old CEO, Howard Solomon, said he would retire as chief executive, presumably because of Icahn’s criticism of him. The company’s recent earnings justify Icahn’s attack on Forest Labs management. In fiscal 2013, the company’s sales fell by roughly a third from the year before. This was partly to do underperformance of its Alzheimer’s disease treatment Namenda. Also contributing was the company’s loss of its exclusive patent on antidepressant Lexapro.

3. Applied Materials
> Net profit margin: -5%
> Net income: -$392 million
> R&D spending: $1.3 billion
> Industry: Semiconductor equipment and materials

Applied Materials Inc. (NASDAQ: AMAT) is one of the world leaders in providing tools for semiconductor fabrication. Applied’s only growth in 2012 came from its major acquisition of Varian Semiconductor Equipment Associates. Excluding the acquisition, which was completed in November 2011, revenue fell by more than 17% in 2012 compared to the previous year. Applied’s investment in R&D recently has come into question again when the company issued a disappointing earnings forecast. On the heels of that announcement, Wall Street research house DA Davidson downgraded the stock from Buy to Neutral. In the most recent quarter, the company recorded a net loss of $129 million, compared to a profit of $289 million in the same period a year earlier.

2. Hewlett-Packard
> Net profit margin: -12%
> Net income: -$13.4 billion
> R&D spending: $3.4 billion
> Industry: Computer systems

Hewlett-Packard Co. (NYSE: HPQ) is considered by many experts to be the worst-run company in the sector. HP has gone through a series of CEOs and board members. It recently made a catastrophic mistake when it bought U.K. software company Autonomy for $11 billion. HP has had to take an $8.8 billion writedown, much of it against the valuation of Autonomy. What is most damning about HP’s R&D is that it has not yielded any important new products. Its sales remain dominated by PCs, servers, IT services and printers. Many analysts wonder why HP did not make a serious attempt at using its brand to press into the tablet and smartphone markets. Some argue the company should spend more on R&D, which totaled just 2.8% of sales in 2012, and which has fallen for years relative to sales.

1. Advanced Micro Devices
> Net profit margin: -15%
> Net income: -$739 million
> R&D spending: $1.3 billion
> Industry: Semiconductor

Despite considerable R&D spending over the years, Advanced Micro Devices Inc. (NYSE: AMD) has never had substantial success competing with much larger rival Intel in its core market. Intel historically has held more than three-quarters of the market of chips for PCs and servers. Making AMD’s current situation even more dire, most smartphones and tablets do not use PC-based chips at all. The growth of these two types of devices has depressed global PC sales, and with it AMD’s chip sales for that market. Recently, market research firm International Data Corp. estimated that PC sales will decline 7.8% between 2012 and 2013. While Intel has started to make its mark on the market for tablet and phone chips, AMD’s R&D has failed to seize the opportunity.