Corporate actions set to leap, says equity chief

Head of equities at Bancaja Fondos in Spain, Francisco Blasco, thinks that with companies' current cash levels and with a return of confidence in markets, investors can expect to see a sharp recovery in M&A, capital expenditure, increases in dividend and share buy backs.

After the cutbacks made by companies in 2007, and the following two years of accumulation, cash reserves are ready to be unleashed, he thinks.

‘With the current levels of cash and the good results available for the second quarter it would be natural to expect companies to move from a capital preservation policy into an expansive one,' said Blasco, who is formerly Citywire AA-rated. 'Most of the companies would have difficulties in finding a better yield elsewhere than investing in themselves.'

The Spaniard points to indicators such as Germany's IFO Business Climate Index, the IBES consensus (Institutional Brokers' Estimate System) and the positive stress test results as supporting his hypothesis.

‘The better than expected quarterly figures from S&P 500-listed firms shows international companies have started their recovery. Dividend payouts fell in Europe by 28% on average during 2007 to 2009 and some sectors such as finance fell 62%, materials 38% and IT 37%. This reduction, plus the increases in company profits, has fed the levels of cash up to 16% of the market capitalisation of European companies. That means that European companies have some $428 billion to invest. As for the US, companies listed in the S&P500 has some $3.2 trillion in cash,’ says Blasco.

Such phenomenal reserves of cash could be used in three ways, he thinks: financing capital expenditure, mergers and acquisitions, or keeping shareholders happy by paying higher dividends or buying back shares.

‘In my opinion the three sectors in Europe most likely to benefit from an increase in dividend are telecoms, utilities and energy, which have an average dividend yield of 5% while materials, consumer discretionary and financials have the best options for dividend growth and share buy-backs,’ says Blasco.

Blasco is head of equities at Bancaja where he’s in charge of a raft of European equity funds, among them Bancaja Construcción, which invests in basic materials firms from the EU.

Since Blasco has managed the Bancaja Construcción since February 2000, since which time the fund has posted returns of 66% while its benchmark, FTSE AW Europe (Dev)/Construction & Materials has risen 48%.