According to Morgan Stanley, European companies have never been richer and are ready to inject the cash – including paying out some of it to shareholders. The Wall Street bank has named a number of stocks that have strong balance sheets, stable cash flows, and will return excess cash to shareholders through buybacks and dividends. “With uncertainty high and the MSCI Europe down 13.5% year-to-date, strong balance sheets, ample liquidity and resilient free cash flow are the focus of investors,” Morgan Stanley strategists led by Todd Castagno said on June 17 . “Companies with such attributes should be able to weather any sustained storm, deploying capital effectively and capitalizing on opportunities that come their way,” they added. Now the MSCI Europe is even deeper in the red. The index is down more than 20% for the year and could see further downside as central banks around the world hike interest rates to curb rising inflation. With the stock market being a tough hunt these days, Morgan Stanley has attempted to compile a list of stocks with strong balance sheets and attractive returns for shareholders. “When there is a lot of uncertainty and volatility, investors tend to go back to fundamentals, the most fundamental of which are cash and free cash flow. Cash levels are a good indicator of how companies perceive the business environment, and uncertain times tend to lead to increases in cash,” Castagno said. The bank noted that MSCI Europe companies collectively hold about 1.2 trillion euros ($1.26 trillion) in cash in the first quarter of this year, with nearly half of the companies showing an increase in cash over the same reporting period of the previous year. Strong Balance Sheets Morgan Stanley looked for companies with “cash and cash equivalents to operate and service debt; and … [the] Ability to meet long-term commitments with relatively comfortable levels of debt, leverage and interest coverage.” Stocks that popped up on screen include technology consultancy Capgemini, food giant Compass Group, food giant Nestle, Ferrari, Airbus and luxury giant LVMH. All will bank rated overweight Read more These global stocks with low volatility and low dividends are outperforming the market — and could rise Goldman Sachs says these global companies are poised to return more cash to shareholders These battered global tech stocks have strong fundamentals — and Analysts Love Them Resilient Cash Flow Morgan Stanley also likes companies with resilient free cash flow Free cash flow – the cash flow generated by a company after accounting for operating and capital expenditures – is used as a measure of financial health and profitability ability is an important measure of the amount of capital that can be returned to shareholders through dividends and/or buybacks. “Cas Rich companies with high free cash flow yields should also have better downside protection while offering upside potential if management is able to use its cash effectively,” Castagno said. The bank looked for stocks that are expected to grow its free cash flow by more than 7% over the next two years. The stocks are also expected to increase their return on invested capital — a measure of how well a company is using its capital to generate earnings metrics — by more than 10%. Overweight stocks that popped up on the bank’s screen include oil companies BP and Shell, shipping company AP Moller-Maersk, mining company Rio Tinto and delivery company Deutsche Post. Attractive total returns Companies can return capital to shareholders in a variety of ways, including through dividend payments and share buybacks. Stock buybacks are when a company buys back its own stock from the stock market. This increases the company’s earnings per share given the smaller tally of outstanding shares and potentially increases the value of the stock. Morgan Stanley noted that net buybacks and dividends have accelerated over the past 12 months, with 397 billion euros returned to shareholders over the period. That’s a 66% increase from a year earlier, the bank noted. “Companies with sustainable cash flows could benefit from low valuations and accelerate shareholder returns,” Castagno said. Stocks that appeared on the bank’s stock list with attractive total shareholder returns include mining company Glencore, insurer AXA, French supermarket chain Carrefour, German specialty chemicals company Evonik, French tire maker Michelin and German industrial group Siemens. Only two stocks appeared on all three screens – automaker Stellantis and Norwegian renewable energy company Norsk Hydro. Both stocks have strong balance sheets, stable cash flows, and offer attractive total returns, according to Morgan Stanley.
