Europe

GLOBAL INVESTOR 1.14 — 37
their purse strings
For the most part, we believe today’s corporate sector is resilient
and we think it is better positioned to weather an unexpected
credit shock. Many corporates have used the prevailing low
interest rate environment and strong demand for credit to
European economic recovery means better economic visibility
or at least more certainty. During the height of the Eurozone
crisis, management had to formulate contingency plans in case
the common currency experienced an existential threat. Now, as
forward visibility improves, companies may be more willing
to engage in corporate actions to pursue growth opportunities.
This could include raising capital expenditure, entering into
mergers and acquisitions, or returning cash to shareholders via
dividends or share buybacks. In reality, it is likely that we will see
a combination of all these measures.
Priority
Examples
MORE
IF
IF
IF
Maintenance capex needs to
occur regularly to replace
equipment wastage and avoid
capex is necessary if running
up against full capacity
Potential to consolidate
a market, eliminate a
competitor, improve
market share; enter new
business field
Increase if supported
by earnings improvement
and sufficient financial
flexibility
IF
IF
Undertake if substantial
management perceives
current share price
to be low
Economic uncertainty is
increasing, or if temporarily
elevated due to prior M&A,
for example
Civil aerospace – Airbus and Boeing
and jet engine suppliers are having to add capacity
to meet Asian / Middle Eastern demand
General industrial – Automation/
Robotics applications with beneficiaries ABB,
Kuka, Fanuc
Oil & Gas – equipment to sustain
the boom in US shale gas
DIVIDENDS
Several firms have established
track records of
regularly increasing their
dividends. Examples include
Chevron, McDonalds,
Johnson & Johnson, L’Oréal,
Novartis, Roche, Altria
Healthcare
is currently very much
in focus. Firms such as Medtronic,
AbbVie, Novartis, Pfizer and others
are looking to improve scale,
strengthen R&D pipelines and in
some cases access overseas
cash via tax inversions
Cash-rich sectors such
as technology, energy and
healthcare have stepped
up share buyback programs, e.g. Apple,
Microsoft, ExxonMobil, Novartis,
but also General Electric, Philip Morris,
Nestlé
European cement
majors are still restoring
financial flexibility
to support credit
ratings. European utility
and telecoms sectors
both have prioritized
debt reduction in recent
years to try to
stabilize credit ratings