London - A series of share buybacks in Europe is sending a mixed message about the economic recovery - companies are financially healthy, but they also seem reluctant to reinvest cash in a stalling economy.
Corporate Europe still lags the US appetite for buybacks, but euro zone inflation has reached a five-year low and capital spending by businesses remains weak.
Any move that enriches shareholders is drawing policymakers' attention.
Switzerland's Nestle, Denmark's Moeller Maersk and commodities trader Glencore have this month announced plans to return some $11 billion (R117 billion) to shareholders in buybacks.
Those deals follow a rebound in dividend payouts in Europe, driven by low interest rates and better corporate profits.
Buying back shares is not a direct cash payout like a dividend, but it does return capital to investors.
It reduces a company's outstanding shares and usually inflates both share price and earnings per share.
Investors and analysts expect European buybacks and dividend payouts to keep rising for the time being.
The European Central Bank is expected to do what it can to keep bond yields low, companies are benefiting from lower costs and a falling euro.
But they look bad for the economy to some.
Corporate cash is handed back to shareholders rather than invested in the company or paid in higher wages.
French President Francois Hollande told the newspaper Le Monde last week bosses should use tax credits to reinvest and hire instead of paying out dividends.
“There is a negative aspect to buybacks, they can only last for so long after that initial (share-price) spike ... And without capital expenditure, you don't get wage growth,” said Brenda Kelly, strategist at IG Markets.
Enriching shareholders can still benefit the economy, others say.
The money gets reinvested and is not necessarily a mark of misguided capital allocation.
They cite the mining and energy sectors as cleaning up years of over-spending and mixed results.
The side-effects of capital return are already a topic of debate in the United States.
Cash-rich American companies have chosen to dip into a collective $1.8 trillion hoard to buy back shares and fund mergers rather than boost growth and returns through long-term investment in their businesses.
That has led Societe Generale strategist Albert Edwards to say companies have been “the only substantive buyers” of US equity in the post-crisis economic cycle; in a note on Thursday, he wrote that companies were essentially issuing cheap debt to buy expensive equity, further inflating asset prices.
Reuters data suggest buybacks are slowing globally, as the United States lays the groundwork for an interest-rate hike befitting its strengthening economy.
So far this year, buybacks are worth around $301 billion worldwide, down from around $380 billion from the same period in 2013.
But in Europe, where the ECB is increasingly expected to loosen rather than tighten its monetary purse-strings, investors are still hunting for companies that are already buying back shares or likely to start.
JPMorgan research shows that while US buybacks represent slightly more than 3 percent of the total S&P 500 index market capitalisation, European buybacks are at 1.2 percent of the total STOXX 600 market cap, with room to grow.
European stocks that have already announced buybacks are slightly outperforming.
A basket of some 30 such stocks - including GlaxoSmithKline, BHP Billiton and Reed Elsevier - tracked by JP Morgan is broadly flat since end-May while the STOXX 600 is down one percent.
“There is still clear demand for cash to be returned to shareholders, in particular where there's been perceived over-investment in the past,” said Robert Parkes, director of equity strategy at HSBC.
“With interest rates where they are and equity valuations still reasonable you would expect a pick-up from here.” - Reuters