Europe's nonfinancial companies have over €1 trillion on their balance sheets
in cash and equivalents (as measured over the last 12 months to Jan. 10, 2013).
In real terms - - adjusted for EU-27 inflation - - the aggregate cash
balance has retreated from 2010's peak (€1,056bn). This is still 21%
higher than the cyclical trough in 2008 and, at face value, a €1 trillion
cash-pile suggests significant financial firepower at the disposal of Europe's
Fourth-quarter profit at European companies fell 5.2% from a year earlier, while
revenue inched up just 0.5%, according to Thomson Reuters while companies paid out about $289bn in dividends for 2012, down 0.8% from
a year earlier - - in contrast to the US, where companies increased their dividends by 18%.
Standard & Poor's Capital IQ data
analysts calculated [pdf] aggregate cash
trends (see chart 1) for Europe's 1,000 largest nonfinancial companies in terms
of total debt outstanding - - a universe they call the Europe Debt 1000. This
includes both publically listed companies and private companies with public
debt, and constituents are recalibrated annually.
They say it's important to keep in mind that the macroeconomic measures that point to
weak capex (capital expenditure) are only indicative of domestic expenditure. This ignores the large and growing share of European
corporate capex that is now directed to emerging markets. Even if capex growth were to pick up strongly, this shift in
destination means that the marginal contribution to domestic economic growth will be more modest than it used to be.
In S&P's view, there are three main reasons to be skeptical about the potential
for European corporates running down their cash balances to the benefit of Europe's economies any time soon:
- First, there is evidence of a strong precautionary motive in the amount
of cash being held that is unlikely to fade in the face of the hard grind of austerity. This is most acute in southern
- Second, many of the industries that hold most of the cash are not those
likely to bring capital expenditure swiftly on stream in Europe;
- Third, pressure on operating cash flow is increasing. Cheap debt capital
has been used to bolster balance sheets but trends in the sources and uses of cash point to a high degree of corporate
The analysis of capex by geography suggests that 42% of the capex spent by European nonfinancial companies goes outside of Europe - - up from 28% in 2007. This
helps explain the puzzle of why economic data are so gloomy in contrast to bottom-up data, which show that capex
spend in real terms over the past 12 months is only 4% below the 2008 peak.
Market fears with regard to the euro's future may have eased, but the
Eurozone (European Economic and Monetary Union) remains trapped in a quagmire of austerity, high unemployment, and
political uncertainty. This has given corporates a strong motivation to hold cash on a precautionary basis, a striking
example of which is visible in the cash balance trends of Spain and Italy.
Chart 3 shows cash and equivalents to total assets for the Spanish and
Italian constituents of the Europe Debt 1000. It shows that, over the last 12 months, there has been a dramatic closing of the
gap between these two countries and the 'core' Eurozone economies in terms of how much cash is held on the balance
sheet. Both Italy and Spain are now close to 9% on this measure, the highest value seen from 2001 onward (see chart 3).
What is striking is that the top seven industries (roughly one-third) have
77% of the cash held by our Europe Debt 1,000. In most cases, they also hold current balances that are significantly
higher than their inflation-adjusted average.
However, the analysts say that the nature of the sectors suggests that any uplift in capital
spending is likely to be gradual. This is because:
- Utilities, transport, and telecommunications all have long lead times
and often significant political hurdles in relation to capital spending. This is not to say that there is not the potential for
a major upsurge in capex in these sectors to meet, for example, Europe's pressing energy needs and the arrival of
fourth-generation (4G) telecoms networks. Nevertheless, absent government
intervention, these are likely to be long-term programs that are less
sensitive to near-term movements in the economic cycle;
- Energy and materials are essentially global sectors, meaning that much
of their incremental capital spending would take place outside Europe. Shale gas fracking might be one area of rapid
domestic expansion, but this would still be a relatively small proportion of the total capex of these industries;
- The car industry in Europe is already suffering from significant
That leaves capital goods -- a sector that would certainly have the potential
to boost spending as economic recovery gains traction - - but this is only one of the top seven.
Company cash hoards rise to $8tn; Taxes, squeezed labour and 'trapped' cash
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