Europe’s Biggest Companies Have More Room for Buybacks and Deals

(Bloomberg) — Financial leverage at Europe’s biggest companies is expected to ease this year to the lowest since 2008 and the global financial crisis, potentially allowing for more dividends, buybacks and M&A. 

The ratio of net debt to Ebitda for members of the Euro Stoxx 50 index is set to fall to 0.76 times, a little more than half the level as recently as four years ago, according to data compiled by Bloomberg Intelligence. That gives companies “leeway either to increase shareholder cash returns or focus on bolt-on acquisitions,” according to BI strategists Laurent Douillet and Kaidi Meng.

Debt burdens at Europe’s blue-chip companies are easing because they continue to generate solid cash flow at a time when elevated interest rates and pressure from activist shareholders not to overpay has slowed major M&A. Firms now have extra cash on their balance sheets that they could use for dividends or buybacks.

“The narrative that leverage is not much of an issue at the moment, particularly if we remain in a fairly benign, modestly growing environment, means we could see even more momentum in that space,” said Gerry Fowler, a strategist at UBS Group AG in London. 

The Euro Stoxx 50 index in any case represents the “high quality, low leverage, pretty high margin top end of the market,” Fowler said. He cited companies like chipmaking equipment manufacturer ASML Holding NV, obesity-fighting drug producer Novo Nordisk A/S and industrial gas supplier Air Liquide SA as among those best exemplifying those attributes.

While these companies may not take easing leverage burdens as an automatic signal to be more generous to shareholders, they may be encouraged by “rising confidence” over economic trends across most sectors, Fowler said.

Dividend estimates for the Euro Stoxx 50 have risen 7% since late November 2023, BI’s Douillet and Meng said. They expect share buybacks to surpass €50 billion ($54.5 billion) in 2024, significantly higher than the €35 billion market estimate at the beginning of the year, but still down on 2023’s reported €72 billion. 

As for M&A, Fowler said dealmaking remains muted, even if it has picked up a little from last year. There is more likely to be an increase in initial public offerings as market conditions improve and political uncertainty in parts of Europe settles. 

“The flood gates aren’t open because there is still a concern around pockets of volatility and the sellers would like the valuations to be higher,” Fowler said. “But if European valuations were to rise a bit further, if some of the election-related risks started to subside, then I think that there will be a pretty steady, if not rapidly growing stream of IPOs.”

Political Risks

For some parts of Europe, however, politics casts a shadow over the brighter outlook for debt levels and what it means for shareholder returns. The possibility of a French tax on dividends and buybacks would affect an estimated 33% of index members’ shareholder returns, Meng and Douillet said. 

Political gridlock following France’s snap election has effectively frozen decision making for major companies operating in the country until October or November, said Oddo BHF strategist Thomas Zlowodzki.

“In theory you have more leeway, but we are being cautious.,” he said. 

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