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European companies reduce cash piles and pivot back to securities


The top 10 EuroStoxx 50 companies reduced their cash holdings by €9 billion while ramping up their securities investments by €2.75 billion since the start of 2021 as they plan for the post-pandemic world

by Anmol Karwal

Published: 21 September 2021

Treasurers at Europe-based multinationals are acquiring a renewed risk appetite as they unwind vast cash piles accumulated in 2020 as a cushion against the pandemic. In a region bedevilled by negative interest rates, treasurers hope to reverse a nosedive in investment returns where companies which used to earn well over 200bps on their investments were now hardly able to earn half of that.

The top 10 companies in the EuroStoxx 50 index as measured by their cash and securities holdings reduced their cash positions by €9 billion or 5% from €173 billion to €164 billion in the first half of 2021. These cash piles are being deployed in a wave of mergers & acquisition deals and strategic post-pandemic investments. Meanwhile, treasurers are pivoting back towards higher risk securities as investment holdings expanded by 6% or €2.75 billion at the end of June 2021.

High Risk – High Return

The French luxury goods companies, LVMH Louis Vuitton Moët Hennessy led the trend, slashing its cash holdings by €12 billion to €7.2 billion at the end of Q2 2021, this was primarily due to the payment of the purchase price for Tiffany which was acquired by LVMH in January 2021 in an all-cash deal.

Following LVMH’s lead was the multinational pharmaceutical giant, Sanofi as it shed off €4.2 billion from its cash & cash equivalents, taking the liquidity to €9.7 billion at the end of the first half. As per its latest filings, the company used €1.3 billion of cash for acquisition of Kymab, Kiadis and Tidal Therapeutics during the first six months.

The German industrials conglomerate, Siemens also followed suit with a €3.4 billion, or 24% reduction in cash & cash holdings, taking the metric to €10.67 billion as compared to €14 billion in 2020. The cash was mainly used to fund the company’s €16.4 billion acquisition of Varian Medical Systems in April 2021.

Meanwhile, Volkswagen Group, which has the largest holdings of cash and securities of all companies in the EuroStoxx 50 index, bucked this trend with a 27%, or €6.7 billion rise in its cash & cash equivalents holding to €31 billion at the end of Q2. Other German automakers including Daimler and BMW also followed VW with a 14% and 5% rise in cash holding to €26 billion and €14 billion respectively during the same period.

The automakers aren’t expected to hold onto the cash for long, signalling to investors that it will be used for acquiring battery manufacturing capacity, and vertically integrating supply chain to address the semiconductor shortage in the coming quarters.

Despite the divergence in cash holdings during the first half of the year, the strategy for increasing returns in the coming quarters was in line for all treasurers as companies ramped up their securities investments during the first half.

LVMH led the trend with a 64%, or a billion euros rise in its investment in available-for-sale securities to €2.5 billion in Q2 from €1.49 billion at the start of the year.

The French utilities company Engie's investments portfolio stood at €4.7 billion, a billion euros higher than 2020. The investments are mainly concentrated in money market funds and bonds.

While the Stuttgart based automobile manufacturer, Daimler was the only one to reduce its investment holdings by 8.5% to €5.9 from €6.3 billion in 2020.

As reported by EuroFinance, treasurers at the top 25 S&P companies also increased their securities investments by $20 billion in the second quarter of 2021 while reduced their cash holdings by $27 billion during the same time period.

Declining EIR

Despite the increase in higher yield securities, the Effective Investment return (EIR) as measured by dividing investment income by the cash and securities balance fell by 55bps from 0.96% to 0.41% at the end of Q2, lowest in five years.

Sanofi, which holds 80% of its investments in money market funds, term deposits and commercial paper, recorded a 68bps decline as it earned only 0.47%. As the company holds its cash and securities in different currencies, it uses foreign exchange derivatives to hedge against currency fluctuations. The strategy helped the company gain €28 million out of the €33 million of investment income it earned in the first half of the year.

Alongside Sanofi; Engie, LVMH and Airbus also saw their EIR decline by 32bps, 65bps and 28 bps to 0.45%, 0.14% and 0.37% respectively.

However, the automakers fared better as compared to their peers as returns declined by 9bps for Daimler and only 1bps for BMW during the first half of the year. VW does not disclose interest income in its interim filings but it earned €793 during 2020 on gross liquidity of €31 billion at the end of 2019, leading to an EIR of 2.5% during 2020, highest amongst its European peers.

As previously reported by EuroFinance, automakers have been increasingly diversifying away from cash & cash equivalents to bond funds, equities, commodities and volatility helping them consistently earn high returns and beat the Euribor benchmark which yields a negative interest rate.