What Should European Companies Do With All That Cash?
On Nov. 16, Vodafone Group PLC (VOD ) will deliver a stunner of an announcement. After spending the past five years and hundreds of billions of dollars gobbling up telecom companies around the globe, the world's top mobile-phone operator is expected to declare it has more money than it knows what to do with. Vodafone, execs say, has accumulated more than $15 billion in cash in recent years -- and has run out of takeover targets for now. So it plans to return some of its hoard to investors by raising its dividend. "The board is of a mind to increase the amount of returns we are giving to our shareholders," Vodafone CEO Arun Sarin told investors in September. Since he made the announcement, Vodafone stock has risen 9%.
Vodafone is not alone. The king of telco mergers is just one of many companies with huge war chests they are reluctant to spend in a shaky economy. Blessed with low debt costs and solid demand from the U.S. and Asia, businesses throughout Europe are generating massive amounts of dough. Companies from Nokia (NOK ) to BP (NOK ) to Novartis (NVS ) to Peugeot (PEUGY ) are throwing off cash. Indeed, says Lehman Brothers Inc. (LEH ), as of October, European companies had $470 billion in free cash flow, which is available for dividends, share buybacks, capital expenditures, and debt reduction. That's an increase of 14% from last year, and it's up 72% from October, 2002.
Companies could put the cash into new plants and equipment, increase their staff, or snap up rivals -- and would have done all of those things five years ago. Instead, Europe Inc. has put the money in the bank and is returning it to shareholders through share buybacks and dividend hikes. British companies have been particularly active. In the first half of 2004, share buybacks jumped 72% over the first six months of last year, to $11.2 billion, according to the Office for National Statistics. It's a conservative route after the go-go years of the 1990s. "Compared with five years ago, companies are being sensible," says Michael O'Sullivan, head of global equity strategy at State Street Global Markets (STT ) in London.
Among the biggest money machines in Europe these days are oil companies, financial firms and telecoms. The telcos balance sheets have changed dramatically in two years, since low interest rates have enabled them to refinance and pay down debt and still have cash to burn. Along with Vodafone, British mobile operator mm02 (OOM ), Deutsche Telekom (DT ), and Telecom Italia (TI ) are likely to boost dividends, say Lehman analysts. In all, Lehman reckons payouts by telcos will rise 22% in each of the next two years.
Communications technology firms are producing cash as well. Mobile giant Nokia, for one, had an overall cash position of $15.1 billion as of the end of September, thanks in part to higher sales in its networks and multimedia divisions. In the third quarter, the Finnish company spent $673 million repurchasing 55 million shares.
Companies like Nokia may get gold stars for prudent management. But their failure to invest their cash in mergers and capital improvements is also a bad sign, since it means they can't find good investment opportunities. Indeed, execs admit they don't feel confident building up new industrial capacity in slow-growth Europe. And they're concerned that the U.S. economy could slow next year, dragging the rest of the world down with it. "People are worried about a big slowdown in U.S. consumption," says Peter Oppenheimer, head of European portfolio strategy at Goldman Sachs in London. "U.S. consumption has boomed so much, and consumption is such a high share of [gross domestic product] there, that people don't want to invest aggressively now."
So don't expect Europe's stash of cash to herald an M&A boom -- or even a boomlet -- anytime soon. "After the end of the bubble years, the focus is more on cash preservation," says Clive McDonnell, European strategist at Standard & Poor's in London. Sure beats cash liquidation.
By Laura Cohn in London