Dividends are the fashion item in Europe Whatever the eurozone's travails may throw up, many European companies are concluding that the right answer is to hand more cash back to their shareholders. This year's annual meeting season has been notable for the succession of groups approving higher dividend payments, sometimes even after they have reported a drop in earnings. Analysis by Shore Capital shows that only one in five continental European companies cut their dividends, while half increased them. "It looks as though we are finally seeing some European dividend resilience," says Alex Stewart, analyst at Shore. We would have expected - given the eurozone macro uncertainty - that more companies would have opted for a precautionary dividend cut. Charles Cara, analyst at Absolute Strategy Research, believes that European companies are moving closer to adopting the progressive dividend policy more often associated with the UK market. "In the 1980s and 1990s their dividend cover stayed within the 2.0-2.9 times range," he says. But in the current recession, it has dropped as low as 1.4 times, as companies have maintained their dividends in the face of falling profits. While emphasising that the aggregate dividend numbers contain a wide divergence across different countries and sectors, Jonathan Stubbs, a Citi analyst, agrees that there has been a recent shift in the European payout ratio - the proportion of earnings paid out in dividends. Over the past 15 years, it has been relatively stable at around 40 per cent. It spiked up to 60-70 per cent in 2009, and then fell back to around 40 per cent as earnings recovered. In the last six to 12 months, among eurozone companies it has gone up from 40 per cent to 50 per cent. Some companies, notably French food company Danone, and Swiss pharmaceuticals groups Roche and Novartis have a long record of consecutive dividend increases. But in the European corporate landscape more generally, dividend payments have tended to represent a set proportion of earnings and simply fluctuated with them. While companies with a history of a progressive dividend policy often highlight their record to provide assurance for investors that their approach is sustainable, the recent shift towards higher payouts is notable for being visible primarily from the numbers. Only a few bellwether companies have been more explicit about what they are doing. In September last year Chris Viehbacher, chief executive of Sanofi, said the French pharma group believed it could progressively increase the dividend payout ratio to 50 per cent. In November 2010, Siemens announced that it was defining a clear dividend policy "for the first time in its history." Peter Löscher, chief executive of the German industrial conglomerate, said at the time that with the new policy the group was "providing long-term investors with an additional incentive to invest in Siemens." Analysts say pressure from investors is one immediate reason for the shift in dividend policy. "The uncertain economic climate means that companies are not doing much capital expenditure or M&A, so they have cash on the balance sheet," says Graham Secker, European equities analyst at Morgan Stanley. If you are a company without much growth then there's no reason for anyone to buy your shares unless you produce income. Mr Stewart says that European companies may also be realising that the competition to attract investment has got tougher. "European companies recognise that many of them operate in a global corporate environment," he says. If I am a consumer goods group in continental Europe, and I see that I am competing against companies such as Unilever, Coca-Cola and Colgate which all have stated dividend policies, then I might well conclude that I'd better have one as well. Mr Cara sees longer-term causes as well, as corporate reforms such as those enacted by Mario Monti's government to ban executives from holding a board seat on more than one financial institution operating in the same market, have strengthened and broadened shareholder authority. There have been some changes in the ownership structure of listed companies in the last 15-20 years, and this shift lies behind part of the move. Power used to be vested in a limited number of actors among shareholders, but reforms in Germany in the late 1990s and most recently in Italy have distributed power to a wider number. Mr Stubbs believes that the economic and political risks will continue to discourage companies from spending their cash on capex and deals, producing a climate in which shareholders will still demand more income from corporates. But he is clear that the real value for shareholders lies not in a one-off dividend increase but a steady progression that can last. "High dividend yields on their own may not suggest a good investment opportunity," he says. We would prefer to focus on companies offering decent dividend yields backed by good cash generation and with the expectation of sustainable dividend growth.