Goldman Tips BNP, Mercedes for Dividends; Sees First Solar Rise

Key Takeaway

• European firms in the Stoxx 600 hold $1.6 trillion in cash, with a free cash flow yield of 6%, outpacing the U.S.
• Goldman Sachs highlights companies like BNP Paribas and Mercedes-Benz for high, sustainable dividend yields.
• First Solar's stock target raised to $268 by Goldman Sachs amid booming demand from data center sector giants like Microsoft.

European Companies' Cash Reserves Surge

European companies are currently experiencing a significant increase in cash reserves, with firms in the Stoxx 600 index holding nearly 1.5 trillion euros ($1.6 trillion) in cash. This figure represents a 25% increase compared to pre-pandemic levels, as highlighted by Goldman Sachs. The free cash flow yield in Europe stands at around 6%, surpassing that of the United States by more than one percentage point. Sectors such as autos, commodity producers, and financials are showing the highest yields, with a particular emphasis on the latter two due to their focus on shareholder returns. The strength of company balance sheets in the region is underscored by a net debt to EBITDA ratio that is near an all-time low. Additionally, the dividend yield differential between Europe and the U.S. is the narrowest it has ever been, making European investments increasingly appealing. Goldman Sachs notes, "Europe has rarely looked cheaper on an absolute and relative basis," and anticipates dividend growth in Europe of around 3% in 2024 and 4% in 2025, supported by below-average payout ratios and limited investment opportunities.

High Dividend Yield Opportunities

Goldman Sachs has identified several European companies with high dividend yield prospects, focusing on those within the Stoxx Europe 600 that offer the highest 12-month forward dividend yields in their respective sectors. Notable mentions include BNP Paribas, CaixaBank, Mercedes-Benz Group, British American Tobacco, Telenor, Enel, and Credit Agricole. These companies not only offer high next-12-month dividend yields but also maintain sustainable payout ratios, indicating a strong potential for stable income returns for investors. The emphasis on companies with sustainable dividend yields reflects a strategic approach to identifying value stocks, particularly in the banking and energy sectors, where the MSCI Europe Value index offers a dividend yield of 4.8% — significantly higher than that of the MSCI Europe Growth.

First Solar's Potential Amid Data Center Demand

First Solar is poised for substantial growth, driven by increasing demand from the data center sector. Goldman Sachs has raised its stock price target for First Solar to $268, suggesting a 50% upside, following a strong quarterly performance and the potential for adding incremental factories. This growth is further supported by commitments from major tech companies like Apple, Google, Meta, and Microsoft to utilize carbon-free energy for their data centers. Microsoft's recent investment of over $10 billion in renewable energy capacity to power its data centers underscores the growing demand for sustainable energy solutions. First Solar's CEO, Mark Widmar, has indicated the possibility of expanding the company's manufacturing capacity to meet this enduring demand, especially if the policy environment stabilizes post the U.S. presidential election.

Street Views

• Goldman Sachs (Bullish on European companies):

  "European companies are more cash-rich than they’ve been in recent history... The free cash flow yield in Europe is around 6% — more than one percentage point above that of the United States... We think dividends can continue to grow in Europe given that payout ratios are below the historical average … and investment opportunities remain scarce."

• Goldman Sachs (Bullish on value stocks, particularly banks and energy):

  "There are also good opportunities in value stocks right now, particularly in banks and energy. The MSCI Europe Value index offers a dividend yield of 4.8% — 2.8 times that of the MSCI Europe Growth... In this environment, we think investors should also focus on stable income strategies as income is likely to become an important driver of returns."