Massive dividend payments and mega mergers: With markets flush with central bank easy money companies have begun to raid their war chests, gobbling up competitors or rewarding investors.
In the first quarter of this year dividend payments jumped by nearly a third and several titanic tie-ups were announced, with the US in the forefront.
Global growth remains sluggish, but its return is sufficient “as all over the markets there is liquidity waiting to be used as everything has been done to stimulate them, especially by the US Federal Reserve and Bank of Japan,” Barclays Bourse portfolio manager Renaud Murail said in Paris.
The US, Japanese and British central banks have conducted massive purchases of assets in recent years in order to inject liquidity in the markets and aid stalled economies.
On top of this central bank liquidity there are the funds “accumulated by European companies as a precaution after the liquidity crunches they experienced in 2008 and 2011,” said Romain Boscher, global head of equities at asset manager Amundi.
With the global economic crisis receding and eurozone tensions dissipating, companies are no longer hoarding cash. The amount they have been paying out to investors has soared.
Globally, dividend payments jumped by 31.4 percent in the first quarter of this year compared with the same three month period last year, according to a study by Henderson Global Investors.
It hit US$228 billion, the best quarter since the end of 2012.
“The lack of visibility led companies to make big restructuring efforts, especially in the United States. American companies have accumulated huge war chests... Now there has been a break in the clouds, this cash is coming out of the vaults to finance share buybacks, dividend payments, our mergers and acquisitions,” Murail said.
However, Boscher said there is one big difference between European and US companies.
“European companies are very far from returning to their levels of profitability before 2007 and have not yet launched massive share buybacks,” he said.
US companies have also been the most generous to their shareholders. With payouts to investor up by 30 percent in the first quarter, they far outpaced their European and Japanese counterparts, Henderson data showed.
There is also a return to the mega mergers of before the global financial crisis: General Electric Co has its eyes on French energy and transport company Alstom SA, Pfizer Inc sought to swallow rival AstraZeneca PLC, Omnicom Group and Publicis Group Inc tried to create the world’s biggest advertising company, while AT&T Inc is buying DirecTV Group and Comcast Corp is taking over Time Warner Cable Inc in a big shake-up the US market to provide Internet and TV content to US homes.
The mergers are not being financed with the firms’ own funds.
“Companies are benefiting from their ability to borrow at ultralow rates from banks or raise large sums on the markets on very attractive terms,” Murail said.
And the benefits spread beyond the most solidly performing firms: with superlow interest rates prevailing, Murail said investors looking for higher returns are sacrificing a bit on the quality of their investments.
“The wave of mergers and acquisitions is just beginning,” Boscher said. “In a period of weak growth, it more reassuring to buy a competitor than to open a new factory.”