From cash hoarding to distribution
* Cash hoarding since the ‘Great Recession’ to ease
During the ‘Great Recession’, companies hoarded cash. Cash-to-asset ratios
are high and leverage for non-financials is comparably low. With less macro
uncertainty and a falling equity risk premium, focus on corporate use of cash
increases. In addition, the cost of credit remains close to multi-year lows,
particularly relative to the cost of equity, pointing to re-leveraging.
* Investment spending losing out to cash returns
Over the last decade, European companies (ex financials) spent a smaller
proportion of their cash on investments for growth (capex and M&A) while
increasing returns to shareholders (in particular dividends). Capex is still
the largest cash expense and at a new peak, but growth has lagged that of
dividends and we do not expect a reversal of that trend. Less investment
spending does not have to indicate lack of growth. Declining capital
intensity due to outsourcing, low capital goods inflation, and new
technology led to a structural decline in capex relative to sales, in our view.
* Higher cash returns are positive for investors
We expect continued growth in cash returns and recommend several
strategies to benefit: (1) High dividend yield + growth-basket (Bloomberg:
GSSTHIDY) which aims to avoid ‘dividend yield traps’; (2) companies with
the potential for share buybacks; and (3) EURO STOXX 50 dividend swaps.