European Dividends Tumble to Four-Year Low as CEOs Hoard
Companies in the euro area are poised to cut dividends to the lowest level in four years as chief executive officers stockpile cash to weather the region’s sovereign-debt crisis.
Payouts to shareholders in the Euro Stoxx 50 Index (SX5E) will fall by 3.3 percent to a combined 115.48 euros a share this year, according to more than 500 analyst estimates compiled by Bloomberg. Reducing them by that much would cut the dividend yield to 4.3 percent from 6.3 percent in September 2011, even after cash on balance sheets climbed to the highest since 2008, the data show.
The forecasts suggest more companies will follow Royal KPN NV and Enel SpA (ENEL) in reducing payouts as the debt crisis pushes unemployment in Spain and Greece to more than 25 percent and China’s economy cools. Analysts are cutting estimates amid a rally that has sent the Euro Stoxx 50 to a 17-month high as central-bank measures hold down bond yields.
“Within Europe, it’s excess cash on balance sheets” that attracts investors, said Bank of America Corp.’s John Bilton, European investment strategist at Bank of America’s Merrill Lynch unit in London. “The current levels of dividend yield are not sustainable.”
Holdings of cash and equivalents at companies in the Euro Stoxx 50 climbed 9.3 percent to a combined 1,834.44 euros a share in 2012, according to data compiled by Bloomberg. While the gauge’s estimated dividend yield fell over the past year, projections for the Standard & Poor’s 500 Index increased to 2.3 percent from 2.2 percent, Bloomberg data show.
The euro-area economy will shrink 0.1 percent in 2013 after a 0.4 percent contraction last year, according to the median projection of 49 economists in a Bloomberg survey. China is forecast to report 2012 growth of 7.7 percent, the slowest rate since at least 1999, the data show. Those hurdles will help shrink revenue for European companies by 1 percent this year, analyst estimates compiled by Bloomberg indicate.
“The headwinds coming from slow economic growth are driving weak consumer demand, undermining corporate profitability,” said Abi Oladimeji, who helps oversee $4.3 billion as head of investment strategy at Thomas Miller Investment Ltd. in London. “Will companies be able to make enough in earnings to pay those dividends? In an environment where the economic and political outlook is highly uncertain, it is hard for executives to make investment decisions.”
The Euro Stoxx 50 climbed 14 percent last year, the first gain since 2009, as the European Central Bank announced an unlimited bond-buying plan to hold down borrowing costs in the region’s weakest economies and the Federal Reserve began a third round of asset purchases. The index, which advanced to the highest level since July 2011 last week, rose less than 0.1 percent to 2,702.54 the close of trading today today.
Investors have had little choice but to buy stocks as the central-bank action helps force down returns from other assets, said Didier Duret, who helps manage 146 billion euros as chief investment officer at ABN Amro Private Banking in Amsterdam. The 4.3 percent estimated dividend yield of Euro Stoxx 50 members compares with the 1.5 percent yield on 10-year German bunds. Euro-denominated, investment-grade corporate bonds yield 2.06 percent, according to Bank of America Merrill Lynch index data.
“Dividends of quality companies are offering better returns than even high-yielding corporate bonds,” Duret said. “Investors will have to turn to equities to capture those kind of returns.”
The gap between returns from dividends and bond coupons is narrowing as industries such as telecommunications and utilities reduce payouts to conserve cash. The spread between dividend yields on the Euro Stoxx 50 and 10-year bund yields narrowed to 2.77 percentage points on Jan. 11 from as much as 4.67 on June 1, Bloomberg data show.
European telecommunication operators will pay 6.6 percent of their share prices as dividends in 2013, down from 8.5 percent in 2011, Bloomberg estimates show. KPN, the Dutch phone company partly owned by Carlos Slim’s America Movil SAB, plunged the most in 11 years on Dec. 17 after the Hague-based company said it wouldn’t pay a final dividend in 2012 and this year’s payout will fall to 3 euro cents a share.
France Telecom was the worst performer in France’s CAC 40 Index last year, with a 31 percent drop. The Paris-based former phone monopoly will declare a final dividend of 22 euro cents in February, down from 80 cents a year earlier, as it seeks to control debt amid growing competition, according to Bloomberg forecasts that account for earnings and options prices.
Utilities including Enel, Italy’s biggest, are also lowering payouts to shareholders, with companies in the Stoxx Europe 600 Utilities Index forecast to pay an average yield of 6.3 percent in 2013 compared with 6.7 percent last year and 7.8 percent in 2011.
“Telecommunication and utility companies, which used to offer sustainable dividend yields, massively underperformed” last year, said Robert Quinn, European equity strategist at Standard & Poor’s Capital IQ in London. “Dividends from banks, a rich source before the financial crisis, have also practically disappeared.”
Telecommunication companies in the benchmark Stoxx Europe 600 Index posted the worst performance among 19 industry groups last year, sliding 11 percent, data compiled by Bloomberg show. A measure of utilities had the third-largest losses, with a 0.7 percent retreat.
Euro-area banks are estimated to distribute 4.2 percent of their share price as dividends, a yield that has fallen from 10.7 percent in 2008, according to data compiled by Bloomberg.
“On average, European equities look like they have great dividend yields, but investors are well aware that this is not sustainable,” said Jacob de Tusch-Lec, who helps oversee $20 billion at Artemis Investment Management LLP in London. “You see cuts almost like a reset exercise. European stocks look cheap on a dividend yield level, but for a lot of them, we do not care about the dividend yield anymore; we are more worried about the business model.”
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