European firms prefer dividends over re-investing in businesses

New analysis shows that companies across Europe are looking more at paying dividends than reinvesting in their operations.

From the moment a company considers pursuing an initial public offering (IPO), they know they are ceding some control to shareholders who will want to see returns on their investment. But in some companies around Europe in particular, new research has found that paying shareholder dividends is taking precedence over reinvesting cash in the business itself.

Data compiled by Bloomberg shows that firms listed on the benchmark Stoxx Europe 600 Index will pay shareholder dividends at an estimated rate of around €11.54 per share – the highest price since data going as far back as 2002.

At the same time, European firms have increased their cash balances to an impressive €2 trillion – nearly the highest since at least 2003 – and cash flow from operations is believed to the highest since 2001 with a rate of more than €37 per share. Companies on the Stoxx 600 have doubled the amount of cash that they hold.

So, it appears that companies across Europe are building up the amount of cash they keep in reserve and focusing on keeping their shareholders happy. What they are not doing is reinvesting their cash in day-to-day operations.

Why aren’t firms taking the opportunity to capitalise on the early stages of economic recovery? Apparently, they’re biding their time until growth has picked up a little more and business conditions have improved before considering capital expenditure.

Stewart Richardson, chief investment officer at RMG Wealth Management LLP, told Bloomberg: “There is money, but companies don’t want to invest in big capex programs. 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.”

There’s also the argument that low interest rates have played a role. The European Central Bank plans to keep interest rates low for the foreseeable future to support recovery across Europe. In turn, this means that investors seeking strong returns are more likely to be attracted to shares in companies offering good dividends, which will in turn support stock prices. Either way, it may be some time before we see European countries considering a fresh wave of capital spending.