By Lionel Laurent
LONDON (Reuters) - Citi strategists on Thursday urged European firms to use historically cheap borrowing costs to buy back their own shares, a practice embraced by U.S. companies in recent years that has also attracted criticism.
What European companies should do with their trillion-dollar cash pile in a world of rock-bottom interest rates and cheap central-bank money has become a hot topic for investors, as carrying cash on balance sheets becomes costlier while borrowing funds for everything from mergers to buybacks becomes cheaper.
"CEOs: This is an opportunity to use record cheap debt-funding to retire relatively expensive equity funding...use excess cash or debt to buy equity," Citi's European strategy team wrote in a note to clients, saying the cost of corporate debt funding was at record lows relative to earnings yield.
While share buybacks are often hailed by some investors as a form of capital return, reducing the company's outstanding share count and usually inflating both share price and earnings per share, for others they look like a missed opportunity to re-invest in growth or wages; they also may fuel asset inflation.
It is a debate that has already swept the United States, where share buybacks totaled $305.2 billion in 2014 alone, compared with $38.3 billion in Europe. GMO Capital's James Montier said in December that returning cash to shareholders had led to a squeeze on investment, while Societe Generale (PARIS:SOGN) strategist Albert Edwards said buybacks were pushing up already high share prices.
Now that the ECB is set to follow in the U.S. Federal Reserve's footsteps with its own quantitative easing program, investors and analysts expect European companies to pick up the pace of buybacks and dividends: Anheuser-Busch (BR:ABI), the world's largest brewer, hiked its dividend and announced a $1 billion share buyback on Thursday.
Defenders of buybacks say enriching shareholders can still benefit the economy if the money is reinvested elsewhere. They also point to mining and energy companies as having over-invested and delivered mixed results in recent years.
But policymakers will be watching closely at a time when the specters of deflation and sluggish growth are keeping central banks on the defensive. If companies remain reluctant to reinvest in the economy, U.S. buyback critics may also find a home in Europe.