European Finance Chiefs Struggle to Spend Cash

By Anonymous

Finance chiefs at European, Middle Eastern and African companies have a luxury problem: figuring out how to spend $1.1 trillion in cash.

The top cash hoarders in the region are Total SA TOT -1.38% with €29.2 billion ($33.9 billion), Electricite de France SA EDF -1.17% with €28.3 billion and Volkswagen AG VOW3 -2.23% with €27.3 billion, according to a report by Moody’s Investors Service. The data covers 757 nonfinancial companies based in Europe, the Middle East and Africa and showed cash levels reached a seven-year high at the end of 2017.

Many of these firms have started returning billions to investors through stock buybacks and dividends, as well as plowing their money into new capital projects and deals. Share buybacks by companies in the S&P Europe 350 rose to €87.8 billion last year, compared with €77.2 billion in 2016, while dividends crept up to €278.5 billion, versus €262.6 billion the year before, according to S&P Global Market Intelligence. Spending on research and development increased to €146.9 billion in 2017, from €140.2 billion in 2016.

The spending spree is unusual for European finance chiefs, who are often more fiscally conservative than their American counterparts. But Europe’s negative interest rates make hoarding the cash in bank deposits unprofitable. And investors are calling on companies to use their cash wisely by balancing capital allocations to new investments against returns to shareholders and money set aside for a rainy day.

French oil giant Total launched a $5 billion share-buyback program in February and in July said it would increase its interim dividend by 3.2% to €0.64 a share. “We are delivering on our commitment to share the oil price upside with our shareholders with a buyback,” CFO Patrick de La Chevardière said during an earnings call in July.

Diageo DEO -1.32% PLC, the maker of Johnnie Walker whisky and Bailey’s Irish Cream, said in July it would buy back £2 billion ($2.6 billion) in shares to return money to shareholders. The company, which is among the top 200 holders of cash in EMEA, completed an earlier share-buyback program totaling £1.5 billion during the fiscal year ended June 30. Diageo also raised its stake in Chinese liquor maker Sichuan Shuijingfang Co. to 60% from about 40%.

“Investors really appreciate our overall approach” to capital allocation, Kathryn Mikells, Diageo’s CFO, said in an interview. “We will continue to make sure we put our cash to work inside the business,” she added. Diageo’s cash pile was down to £874 million as of June 30, compared with £1.19 billion a year earlier.

Idle cash often attracts investor scrutiny. “It is not efficient to hold large amounts of cash on the balance sheet if it is not being put to use,” said William Coley, a senior vice president at Moody’s.

Akzo Nobel AKZA 0.12% NV has held talks with shareholders concerning how to distribute a large share of the €7.5 billion the Dutch paint maker will receive from the sale of its specialty chemicals business, said CFO Maarten de Vries.

The company last year came under pressure from activist investor Elliott Management Corp. and wants to make sure its shareholders are content. “It’s all about making sure that we create credibility with our investors,” Mr. de Vries said.

Elliott Management, which holds 9.5% of Akzo’s shares, declined to comment.

Thomas Toepfer, finance chief at German plastics maker Covestro AG 1COV -0.49% , had €475 million in cash at the end of June, up from €300 million at the end of the prior-year period. He has increased his budget for capital spending and could spend up to €1.2 billion annually from 2019 onward, he said. Mr. Toepfer plans to use some of that capital to increase the output of his factories, which are operating at close to maximum capacity, and return the rest to shareholders. Covestro spent more than €1 billion on dividends and share repurchases in the first half of 2018, Mr. Toepfer said.

Some executives are going even further. Kevin Entricken, CFO of Dutch software company Wolters Kluwer NV, is raising Wolters’s interim dividend to 40% of last year’s regular dividend, up from 25% in prior years. The firm through the end of July completed a €300 million share repurchase and will buy back up to €550 million in stock later this year. Wolters’s cash hoard has declined to €654 million at the end of June, from €1 billion a year earlier.

Many CFOs in the region reinvest substantial amounts of money into the business and pay a special dividend, rather than buying back their own stock like many of their U.S. peers do.

Engie SA, ENGI -0.28% the French energy company, has only done a “symbolical” share buyback of €150 million, said CFO Judith Hartmann. “I do not see us doing more [share buybacks] because that takes away capital for investments,” Ms. Hartmann said in an interview.

The company recently received more than €16 billion from asset sales, but reinvested most of that money. Ms. Hartmann also paid back some of Engie’s debt and hopes to raise its dividend.

Write to Nina Trentmann at [email protected]