LONDON - Equity investors want to have their cake and eat it too as they continue to demand that companies pay out more money and yet insist that they invest their cash and grow as well.
Analysts say European companies are so cash-rich these days that they can afford to
do several things.
"Cash generation is really strong, so companies have the ability to do several things with that," said Inigo Fraser-Jenkins, an equities strategist at Lehman Brothers.
"They can increase M&A [mergers and acquisitions], increase capex [capital spending] and pay cash back to shareholders."
By plying shareholders with bigger dividends and share buybacks, company managers seem to have redeemed themselves after frittering away cash on several exorbitant deals and saddling firms with onerous debts in the tech-bubble era.
But it is not blank cheques that they have earned. Investors may have forgiven firms for spending excesses, but they have not forgotten - not yet anyway, fund managers say.
"It depends. As long as companies are not wasting money, then we're not bothered," said Stuart Fraser, an investment director at Standard Life Investments.
"Our attitude is, 'If you have a good investment opportunity that will increase growth and enhance shareholder value, then do it'."
A Merrill Lynch global survey of 290 fund managers showed that almost half wanted firms to spend more on expanding their businesses rather than increasing cash payouts to shareholders via share buybacks and bigger dividends.
More than half also said companies were under-investing.
Merrill Lynch says the shift in priorities shows investors are becoming more confident about the global economy and believes shareholder value is best enhanced by companies that are managed for a long-term profit, giving them enduring income rather than short-term capital gain.
Just offering shareholders a bit more money is not enough, some fund managers say.
"A company that simply intends to increase dividends and return cash to shareholders is not going to see its shares re-rated just because of that," Fraser said.
Even analysts at Lehman, who see dividend growth as the only variable likely to keep investors "unambiguously in favour" of a stock next year, detect a change in the air.
For them, companies that have already raised their dividends have been fully rewarded by markets.
Fraser-Jenkins said what mattered now was that companies had unrealised potential to grow dividends.
"Firms that have boosted their dividends have strongly outperformed in recent years, but we think their shares look rather expensive now."
Europe's cash-rich telecommunications companies are where the pressure to spend and return cash is arguably greatest, now that they have pared down an overhang of debt from the bubble era.
As rival operators, TV companies, internet firms and even retailers all fight for a piece of the telephony pie and the technology is fast-evolving, there are question marks over the sector's capacity to deliver long-term growth.
The situation
* European merger and acquisition deals this year are edging towards US$1 trillion.
* Almost half of 290 fund managers in a global survey wanted firms to spend more on expanding than increasing cash payouts.
* More than half also said companies were under-investing.
- REUTERS
LONDON - Equity investors want to have their cake and eat it too as they continue to demand that companies pay out more money and yet insist that they invest their cash and grow as well.
Analysts say European companies are so cash-rich these days that they can afford to
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