Many European companies are gambling their long-term financial security with extravagant dividends and buybacks, betting that banks will resume lending before their cash runs out.
An increasing coincidence of dividend hikes and cautious outlooks have made long term investors nervous about how easily the companies they back will access, and pay for, capital against a backdrop of economic unease inEurope.
"There are two things that threaten dividends -- the first is that you pay out too much cash in a cyclical business and the second is that you're just too leveraged," Stuart Reeve, a member of BlackRock's Global Equity team told Reuters.
"We want to know what investment stream we can expect delivered and the capital growth we can reasonably hope for. We don't plan for what might come our way in buybacks. We want to know what the sustainable underlying dividend is," he said.
European companies have announced plans to hand back hundreds of millions of euros to shareholders in the first quarter of 2012, following a period of robust revenues and cost cutting initiatives over the course of last year.
French hotels group Accor will pay almost double its 2010 full-year dividend despite a record expansion and the strong headwinds facing its sector, while Britain's second-largest clothing retailer Next sweetened its warning of negative underlying sales growth with a 15.4 percent hike in its payout.
Europe's largest home improvements retailer Kingfisher twinned the announcement of a bigger dividend with a sobering outlook for the UK economy, while the CEO of luxury goods group Hermes told investors its bumper payout on 2011 earnings "should be seen as exceptional".
Many more European firms are pushing cash back to shareholders as cost cutting initiatives bear fruit.
But some investors say the bigger the payout, the more they worry that last year's sensible stockpiling of resources is being abandoned long before European banks are ready to provide affordable access to capital.
More than a third of 850 delegates polled at Morgan Stanley's recent European Financials Conference said European banks needed to raise at least 100 billion euros to be well capitalized and bank deleveraging would slow economic recovery.
A Reuters poll in February showed the euro zone economy shrinking 0.4 percent in 2012, returning to growth with a 1 percent expansion in 2013.
Those bracing for further shocks to Europe's frail credit market fear rights issues could follow the string of hefty payouts, making the investment banks which run the equity sales the ultimate winners of a poorly timed phase of corporate generosity.
"It might well be that investment banks end up making a fortune here," said Thorsten Winkelmann, a fund manager in the Allianz RCM European Equity Growth team.
"It's really about the health of the company and their ability to have a foot in the financing market if needed."
The average dividend yields of the CAC 40, FTSE 100 and Dax have topped 3.5 percent but Winkelmann said his picks had an average 2 percent dividend yield, which he said reflected a healthy balance between cash given back to investors and reinvested in the business.
James Butterfill, equity strategist at Coutts, said there was much on the horizon that could derail the rally.
"There are elections in France and Greece and a potentially disruptive referendum in Ireland. In addition, the European sovereign-debt crisis is far from resolved. Attention could soon turn to Portugal which needs to refinance 9.7 billion euros of debt maturing in September 2013," he warned.
THINK TWICE
Firms which pay regular, growing dividends are typically dream investments for money managers with annual return targets to hit or for pension funds locked into a continuous battle to match liabilities.
But surprise dividend hikes or companies who shell out above-average payouts are not always popular among investors, especially if they feel cash could be better spent elsewhere.
"I think AstraZeneca is a value trap," said Simon Gergel, manager of the Allianz RCM UK Equity Income Fund and colleague of Winkelmann's said.
"Over the next 6 years I expect its EPS to fall 30 percent despite buying back 30 percent of their equity. Drugs accounting for 50 percent of Astra's sales go off-patent in the U.S. in this period. There's little in the pipeline and cost cutting in R&D means it would be brave to assume too much new comes through."
Hedge fund manager Man Group whose 2011 payout was uncovered and whose 2012 payout is also expected to be higher than earnings, joined the ranks of possible dividend overspenders last month, according to RBC Capital Markets.
Man announced a new dividend policy that will see it pay out 100 percent of management fee earnings as dividends and then give performance fee earnings to shareholders over time via dividends and/or buybacks.
While the acute atmosphere of crisis in stock markets has begun to lift, some fund managers said they were not expecting to see any quick end to the funding strains faced by the majority of companies.
"In a more volatile period of economic trading you might find that those companies are vulnerable to getting caught out, either by not being able to sustain those dividends or potentially needing emergency fund-raisings," Gervais Williams, fund manager at MAM Funds said.
An unprecedented concerted action to cut interest rates in the world's biggest economies helped to keep the number of bankruptcies in the wake of the 2008 turmoil unusually low but corporate pain has only been delayed not avoided altogether.
"Banks will continue to be cautious about lending and companies will struggle to roll-over finance particularly in tougher trading conditions ... it will difficult for companies to make more profit than they have lately," he said.
"I think there will be a lot more companies going bust. And of course before they do that some will no doubt try to get a right issue away," Williams said.
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