European companies report growth in revenue and profits, while Europe has shown the highest economic growth rates in a decade, which makes company leaders think more actively about acquisitions and increase dividends.
According to JPMorgan Chase & Co., as of Friday, more than half of the 294 Stoxx Europe 600 index companies reporting quarterly financial results exceeded analyst expectations. This approximately coincides with the figures of the previous quarter and the comparable period of the previous year. Earnings per share were up 16% from the previous year, with strong growth seen among companies in the oil and gas sector, the materials sector and the discretionary consumer goods sector.
"The performance of an increasing number of companies is exceeding expectations," said JPMorgan analyst Emmanuel Cau. "The profit structure is good, and revenue and margin provide growth."
French cosmetic giant L'Oreal SA said its operating margin last quarter reached a "record level" of 18% of sales. "The market is in good shape and growing," said CEO Jean-Paul Agon at a February 9 financial results conference call.
The German industrial giant Siemens AG reported over the past quarter about an increase in orders of 14% to 22.5 billion euros ($ 27.9 billion), while revenue increased by 3% to 19.8 billion euros. CEO Joe Kather said last month at a financial results conference call that the company's investment in its key businesses and sectors is paying off.
Prior to this, weak growth was observed for many years, and many European companies strengthened the balance by selling unprofitable assets and cutting costs.
As Eurostat statistics agency reported on Wednesday, the eurozone economy grew by 2.5% in 2017, the fastest since 2007, when its growth was 2.7%. As the ECB predicts, this trend will continue in 2018. The Central Bank in December made a forecast that the economy of the countries of the currency block this year will grow by 2.3%. “We are more optimistic, more confident and more determined than ever,” said Agon of L'Oreal.
Amid such optimism, companies are expected to increase costs. JPMorgan’s Kau believes that European companies will spend more money this year on mergers and acquisitions, as well as on dividends and repurchases of their own shares.
“Companies do it when they can afford it and feel confident in the future,” said Kau. “All the key growth drivers are there.”
Since the beginning of this year, European companies have already concluded a number of transactions, including Sanofi S agreed to purchase Bioverativ Inc. for more than $ 11.5 billion. CEO of the Swiss industrial company ABB Ltd. looking for Ulrich Spiesshofer February 8 said at a conference that the company is looking for opportunities for mergers and acquisitions. Danish insulin producer Novo Nordisk A / S is looking for acquisitions in a number of markets, including the United States. This was announced in early February by the outgoing fund director Jesper Brandgaard.
The mergers and acquisitions market can also be activated due to the low cost of financing.
Other companies are increasing dividend payments. Puma SE, a German manufacturer of sportswear and shoes, has proposed a one-time dividend of EUR 12.50 per share this year. L'Oreal, which recorded sales growth in all business divisions, plans to increase the dividend by 7.6% to 3.55 euros per share. As Daimler AG chairman Dieter Zetsche said at the latest financial results conference call, the company also wants to increase its dividend.
However, companies and analysts say that the growth of the euro against the dollar may weaken this optimism. The single European currency, according to FactSet, rose to the dollar by 16.3% compared with the previous year. According to Kau, exchange rate fluctuations affect a number of industries and partly explain the fact that European companies are still behind their competitors from the United States. “Everyone who carries out trading operations abroad is worried about the strengthening of the euro,” he adds.
According to Pernod Ricard SA fund director Gilles Bogert, producer of Beefeater gin and Absolut vodka, expects that due to currency effects its operating profit in 2018 will decrease by about 180 million euros.
In some European countries, companies are forced to increase salaries after a long break. The German union IG Metall and the Federation of Sudwestmetall this month have agreed since April to raise the wages of industrial workers by 4.3%. This agreement also applies to companies such as Daimler.
Yet, as JPMorgan’s Kau pointed out, major European companies are well prepared for these changes. “I think corporations are used to overcoming such difficulties,” he said.