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In a new report, Nomura notes that the corporate sector in Europe has built up an excess of cash, which leads them to believe that companies will “adopt a positive view towards dividends.”Stockpiling cash was a rational approach during the depths of the crisis, but “anemic returns to cash positions” should lead to dividend growth among European corporates.
The reward that companies have received from raising dividends and the likelihood that the corporate outlook on dividends increases has Nomura thinking that there is a “real opportunity for income investors from investing in European equity.” They forecast further dividend growth of 13% over the next year.
While Nomura expects dividend growth, they do warn of the unknown degree of the sustainability of payouts. Even with this concern, the current yield of 4% in European equities against a 2.4% on sovereign debt and 3.6% on BAA corporate debt combined with Nomura’s take on dividends has them currently liking the European equity market.
The corporate sector has built up a large cash reserve. How management teams choose to deploy this cash will be an important determinant of the cross-section of stock returns over the next 12 months. We recognise that corporates can choose to spend this cash in a wide variety of ways (or indeed not to spend it). However, companies that have raised dividends have been rewarded and there is an appetite for yield among investors, so we think that European payouts will increase from these levels.