European companies holding onto their cash despite low interest rate environment

European companies holding onto their cash despite low interest rate environment

September 6, 2019

European companies would rather hang onto their cash despite the low interest rate environment, as they delay making investments amid growing uncertainty over the economic outlook.

Companies across Europe, the Middle East and Africa held almost €1.1 trillion in cash at the end of 2018, a 15% rise from the €941 billion they had on their balance sheets a year earlier, according to a report by Moody’s Investors Service.

The credit rating agency said it expected companies to spend some of their cash on working capital loans to cover the costs of stockpiling goods and materials as the UK prepares to for a disorderly exit from the European Union.

“Our expectation of a general economic slowdown in Europe will curtail cash generation in some sectors,” the credit rating agency said, adding it will likely be accompanied by more conservative financial policies aimed at conserving cash.

Activist investors have been increasingly pushing companies in the region to spend their cash on or give it back to shareholders. Pernod Ricard RI, +0.54% , the French drinks group under pressure from U.S. hedge fund Elliott Management to improve profit margins, announced plans at the end of August for a € billion share buyback program and new investments in China and the U.S. In July, Anglo American AAL, +2.56% announced announced plans to return $1 billion to investors via a buyback which it said reflected the “current levels of cash” the London-listed miner was generating.

Moody’s said that after falling for two years in a row to €200 billion in 2017 from €232 billion in 2015, the cash holdings of the top 10 companies leapt by 30% in 2018 to €260 billion.

Saudi Aramco was the region’s largest holder of cash with €43 billion at the end of last year. The state-owned oil producer is preparing an initial public offering of up to a 5% stake by 2020-2021. The sale of the stake is part of a wider initiative by Crown Prince Mohammed bin Salman to diversify the Saudi kingdom’s oil-dependent economy.

However, as of June 30 this year, Saudi’s reported cash balance fell to €35 billion after a step up in dividend payments, narrowing the gap with the other top 10 companies.

Volkswagen VOW3, +0.60%  the German carmaker, had the second biggest cash pile, up to €37.5 billion in 2018 from €27.3 billion a year earlier thanks to a solid operating performance and lower payments in 2018 related to its diesel emissions scandal. Electricite de France EDF, +0.31% had the third biggest cash pile with €34.2 billion sitting on its balance sheet, compared with €28.3 billion the previous year.

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