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Given the choice between investing in their businesses or paying off shareholders, European chief executive officers are choosing the latter.
Companies of the benchmark Stoxx Europe 600 Index will pay 11.54 euros a share in dividends this year, the most since data going back to 2002, according analysts’ estimates compiled by Bloomberg. At the same time, cash flow from operations is poised to be the highest since 2011, at 37.45 euros a share. Stocks have more than doubled since 2009 after European Central Bank President Mario Draghi pledged to preserve the single currency.
European companies have pushed cash balances to 2 trillion euros ($2.8 trillion), close to the most since at least 2003, following the 2008 financial crisis, according to data compiled by Bloomberg. While the region emerged from its worst recession ever last year, CEOs remain skeptical about the euro area’s economic recovery and want to see results of monetary policy, according to RMG Wealth Management LLP’s Stewart Richardson.
“There is money, but companies don’t want to invest in big capex programs,” Richardson, who helps manage about $100 million as RMG’s chief investment officer, said in a phone interview. “They are uncertain where growth will come from, and there is a huge focus from corporate management to shore up balance sheets and share prices.”
Cash Pile
Since 2008, Stoxx 600 companies have doubled the amount of cash they hold, while capital expenses fell to 18.37 euros a share last year from 20.17 euros in 2008, data compiled by Bloomberg show. About 57 percent of global fund managers said companies should spend their money on business investments rather than on increasing dividends or share buybacks, according to a Bank of America Corp. survey last month.
The Stoxx 600 advanced 0.5 percent to 336.94 at 8:51 a.m. in London. While European stocks surged 17 percent in 2013 on confidence that an improving economy will boost earnings, capital spending may take longer to bounce back, according to Ashburton Ltd.’s Veronika Pechlaner.
“There is still a lot of focus on raising dividends,” Pechlaner, who helps oversee $2.3 billion as an investment manager at Jersey, Channel Islands-based Ashburton, said by phone. “How we progress in the investment cycle is very much relative to the kind of economic recovery we see and disruptions from political events. We could potentially see a pickup in capital expenditure in two years’ time, but not yet.”
Economic Outlook
The euro-area economy will expand 1.1 percent this year for its first annual growth since 2011, according to the median forecast of 53 economists compiled by Bloomberg. The region emerged from the longest recession since the euro’s inception in 1999 in last year’s second quarter, according to the European Union statistics. Earnings at Stoxx 600 companies will climb 9 percent in 2014 to 22.92 euros a share, the most since 2007, estimates compiled by Bloomberg show.
Europe accounted for one-quarter of global capital spending in 2013, compared with a third of all investments in 2003, Standard & Poor’s said last year. The firm said it expects an investment revival in Europe to be slow, warning that low levels of spending will hurt economic growth and have serious implications for employment.
Companies on the Stoxx 600 amassed 2.04 trillion euros, according to their latest filings compiled by Bloomberg. They had 2.16 trillion euros in 2012, the most since data going back to 2003.
U.S. Investments
Meanwhile, there are signs U.S. business investments are rebounding. Companies from Macy’s Inc. to Warren Buffett’s Burlington Northern Santa Fe LLC railroad plan to increase capital spending. Investment in non-residential projects and equipment will climb about 7 percent in 2014 after a 3.1 percent rise in 2013, according to economists at Goldman Sachs Group Inc. UBS Investment Bank predicts a 7.5 percent-increase in equipment spending, followed by a 10 percent gain in 2015.
In Europe, an increase in mergers and acquisitions may signal that companies will move away from using cash to boost share buybacks and dividends to instead start growing their businesses, according to Raiffeisen Capital Management’s Herbert Perus. The value of deals announced in western Europe in 2014 has increased 71 percent from last year to $234.4 billion, according to data compiled by Bloomberg.
“Most companies are sitting on a huge pile of cash,” said Perus, who helps manage about $36 billion as head of equities at Raiffeisen in Vienna. “We’re trying to shift focus from dividend-paying companies into M&A kind of companies. We’ll be happy if companies decide to invest more in businesses.”
Lafarge, Holcim
Lafarge SA and Holcim Ltd. agreed this week to a merger that will create the world’s biggest cement maker. Shares of the two companies jumped more than 6.5 percent each on April 4, when people familiar with the matter said they were in deal talks. Vivendi SA (VIV) agreed on April 5 to sell its SFR phone unit to billionaire Patrick Drahi’s Altice SA in a deal valued at more than 17 billion euros. Vivendi turned down a government-backed offer from Bouygues SA.
The appeal of higher dividends will continue to boost European stocks as they offer better returns than government debt, according to UniCredit Bank AG’s Christian Stocker. This year’s dividend yield for Stoxx 600 companies will climb to 3.44 percent from 3.29 percent in 2013, according to the average analyst estimate in a Bloomberg survey. That’s more than double the 1.58 percent yield on 10-year German bunds and compares with a projected 2.09 percent yield for the Standard & Poor’s 500 Index, the data show.
“The dividend yield compared with what investors can get on the government bond market is very good,” said Stocker, a senior strategist at UniCredit in Munich. “The dividend level should underpin our positive view for European equities.”
Rising Payouts
Companies from Swiss Life Holding AG to Prudential Plc have proposed increasing payouts in the latest earnings season. Swiss Life gained 6 percent on Feb. 26 after raising its dividend by 22 percent. Prudential jumped to a record on March 12 after boosting it by 15 percent. Of the 444 companies in the Stoxx 600 that announced payouts in the last earnings season, more than 75 percent met or exceeded Bloomberg Dividend Forecasts.
CEOs should take advantage of the bull market in equities and the nascent economic recovery to increase project-related spending as it will pay off later, according to Hermes Sourcecap Ltd.’s Andrew Parry.
“We’re in an environment where Europe’s economy is expected to improve,” Parry, who manages about 2 billion euros at Hermes Sourcecap in London, said in a phone interview. “Investors want companies to put their cash to use in expanding their businesses or making acquisitions. Paying dividends is a defensive strategy.”
(Source: Bloomberg)
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