Europe’s Corporates Raise Dividends, But Fail to Invest

By Henry Teitelbaum, Editor, P3

Those oversized dividend payouts that shareholders are getting from Europe’s big, listed companies disguise the sombre reality that corporate Europe just isn’t investing.

The average dividend yield for Stoxx Euro 600 stocks was 2.9% for the year up to Nov. 28. Not only is that far higher than the equivalent 1.85% average payout for US companies included in the S&P 500 index, (as of Dec. 5), it’s the highest since the euro was introduced.

Naturally, this is great news if you’re a short-term investor trolling for good returns at a time when benchmark Euro government bonds are yielding less than half that amount.

But if you’re a long-term investor, you have to be wondering what the value of your investment will be like 10 years hence if Europe’s most promising technologies are rendered obsolete because business leaders failed to make the capital investments that were needed to exploit them.

Take semiconductors — a good example of an industry that requires ongoing capital spending to keep pace with fast-evolving technologies in a global market. Sure there are niche players here and there, but on a global short list, you’d be hard pressed to find any European leaders. And the number of sectors where Europe’s competitive position is slipping is expanding by the day.

Even taking into account the dividend payouts, there are huge sums of capital piling up along the sidelines of Europe’s flat-lining economy. According to Bloomberg, cash balances were nearing €2 trillion earlier this year, though this figure probably includes large amounts of cash borrowed  as well as excess cash generated from operations. More recently, Deloitte estimated that the 1,200 listed companies in continental Europe increased their cash holdings by almost €50 billion in the past year.

Until the past few months, it was easy enough to understand why CEOs would want to restrain capital spending. Demand within Europe has been very poor for a long time due to its financial crisis, which has run far longer than anywhere else in the developed world.

An inadequate monetary policy response from the European Central Bank, along with multiple sovereign debt crises, bailouts, extreme austerity, massive de-leveraging have all figured in the prolonged downturn. But every bit as much as all this, EU’s austerity-minded leadership has done far too little to incentivise private investment.

The the worst of the crisis behind it, oil prices collapsing and the cost of borrowing still at record lows, I find it surprising that businesses are still on the fence with regard to investing in their own expansion. Business leaders with any kind of vision should be moving far more aggressively to restore competitiveness by investing in new capacity, new technologies, or dare I mention it, creating jobs.

There’s also no shortage of public infrastructure projects to invest in across Europe. These range from road, rail and airport transportation development projects to waste management and renewable energy projects that are at the core of Europe’s commitment to mitigating climate change. Not only do these kinds of investments produce healthy returns for investors over the long-term, in the short term they bring a Keynesian lift to the economy, creating jobs that generate growth and strengthen the recovery.

Of course, company boards in Europe are free to continue stockpiling cash and giving back to shareholders what they’re too scared to invest. But it’s not hard to imagine a time when hard-up governments go after this expanding cash pile by raising corporate taxes, or creating new ones. If this happens, Europe’s corporate leaders will have only themselves and their own timidity to blame.

A version of this blog has previously run on LinkedIn Pulse.