ASML HOLDING N.V. Share buybacks and dividends in Europe have picked up from their crisis-era levels -- Dutch semiconductor equipment supplier ASML was the latest to announce a billion-euro ($1.2 billion) buyback on Wednesday -- but still lag the United States, where years of central bank stimulus pushed markets to all-time highs.
While European Central Bank bond-buying is unlikely to spur companies' capital spending -- especially with global growth forecasts taking a hit -- it should drive interest rates down further and entice firms to put cash to work or return it to shareholders. If it also helps exporters by weakening the euro, already near an 11-year low, there may be more cash to hand out.
The mechanism is twofold: as rates fall, carrying cash on the balance sheet becomes costlier while borrowing funds for everything from acquisitions to buybacks becomes cheaper.
"We could have an interesting situation this year where the economy slowly grinds higher but at the same time funding costs and monetary policy remain incredibly supportive for equities," said Robert Parkes, strategist at HSBC Global Research.
"I would not be surprised if you see more share buyback activity in the course of the year."
Companies in Europe, Middle East and Africa have built up cash balances by some 40 percent since the financial crisis to around $1.1 trillion in 2014, according to Moody's estimates, with the top "cash kings" including automaker Volkswagen, utility EDF and oil major Total.
Share buybacks in Europe last year totaled $38.3 billion, according to Thomson Reuters data, a fraction of the $305.2 billion returned in the United States. Dividend payouts as tracked by Henderson Global Investors have outperformed in the United States but underperformed in Europe excluding the United Kingdom.
Returning more capital to shareholders does not necessarily mean eating into existing cash piles -- Siemens, for example, financed its share buyback plan via debt -- but the cost of hoarding this cash is expected to rise if extra ECB stimulus pushes interest rates beyond their already record lows.
This explains why some investors think shareholder pressure on cash-rich companies to return capital, combined with the historical precedent of central-bank stimulus in the United States, the United Kingdom and Japan -- which boosted returns from equities -- will gradually push companies out of ultra-liquid cash investments.
"There will be investor pressure on what to do with company cash," said Ingo Speich, portfolio manager at Union Investment in Frankfurt. "There is too much money out there on company balance sheets ... If interest-rate levels for corporates go negative, you cannot hide in the money markets any longer."
Any significant pick-up in capital return, however, is likely to fuel debate over whether cash that could be reinvested into wages or company expansion is being handed back to shareholders, a choice that some policymakers have criticized.
"You haven't had a lot of companies say they are really confident on the business outlook and will build a plant or recruit people," said Andrea Williams, fund manager at Royal London Asset Management.
There is also the possibility that company management might resist shareholder pressure to spend cash by pointing to already attractive dividend yields in Europe, which on average are at around 3.5 percent.
However, with some estimates pointing to an upside of some 30 percent for European equities in the wake of a QE announcement, investors are betting that more confidence will feed through the corporate sector eventually.
"More liquidity should drive asset prices higher and funding costs lower ... Coupled with the lower euro, that should help strengthen earnings momentum, which should make corporates feel more confident," said Emmanuel Cau, strategist at JPMorgan.
(Reporting by Lionel Laurent; Editing by Ruth Pitchford)
By Lionel Laurent
