Draghi economy fails to stoke cash machine for Europe stocks
Europe’s economy is expanding under Mario Draghi’s stimulus, profits are rising, and the market is up. And yet the proportion of income companies are poised to return to shareholders in 2015 will probably be the lowest in five years.
According to estimates by Bank of America Corp., European firms are likely to spend 30 percent of their cash flow on dividends and share buybacks this year, the least since 2010. Only 1 percent will go to repurchases, the lender projected in a note to clients on June 5.
In contrast to the U.S., where almost twice as much cash flow is returned to shareholders, chief executive officers in Europe are getting stingier when it comes to equity owners -- even after cash balances for Stoxx Europe 600 Index companies reached 2.2 trillion euros ($2.5 trillion), the most since at least 2003.
“Corporates will certainly be waiting to make sure the recovery is real before returning to pre-Lehman ways of shareholder payouts,” strategists including Barnaby Martin and Manish Kabra wrote. High unemployment and low wage growth are deterring share buybacks at a time when “politicians have waded into the debate to suggest that companies should show more restraint in shareholder payouts,” they said.
The euro-area economy is forecast to expand 1.5 percent in 2015, the most in four years, and analysts estimate profits at Stoxx 600 companies will grow 5.4 percent. The benchmark gauge has climbed 13 percent this year.
Growing Skittishness
Still, with the measure down 7.2 percent since its record in April, and Germany’s DAX Index losing 11 percent from its peak, skittishness is growing.
“Everyone still lives in the shadow of 2008,” said David Hussey, head of European equities at Manulife Asset Management in London. “All you ever hear in company meetings are questions about restructuring, cost cutting, debt levels. Investors are all a bunch of bears. That’s not really stuff that makes CEOs want to spend aggressively.”
For now, it’s bondholders who are benefiting. Bank of America estimates that this quarter will see a record 9 billion euros spent in gross corporate-bond buybacks.
“A return of the share buyback theme would be a very important -– and very bullish –- development for European stocks,” the lender’s strategists wrote. “It may simply be early days in the recovery for corporate behaviour to have materially changed, and 2016 is likely be the year when the shareholder gets revenge.”
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