While far from immune from the macroeconomic threats that may dominate 2012, Fitch Ratings believes the corporate sector is far better placed to withstand negative growth or funding shocks than it was going into the 2008/9 downturn. Fitch expects companies to generate operating cash flows similar to 2011’s healthy levels even in an environment of zero real revenue growth. Dividends and capital expenditure (capex) could be cut as a buffer should conditions deteriorate.
Fitch’s overall outlook for the Europe, Middle East and Africa (EMEA) corporate sector is stable, despite an underlying landscape that looks markedly worse than a year ago. Corporates have had plenty of time to prepare for potential downside scenarios. They’ve been hording cash, reining in investment, strengthening liquidity and managing both the level and flexibility of their cost bases.
Fitch’s base case forecast for 2012 is for inflationary revenue growth across the sector (2.5%), and steady margins and funds from operation generation. The ratings agency expects capex to fall slightly after surprisingly strong growth (17%) in 2011, which will have brought it to levels above 2008. It expects lower capex in 2012 to be offset by a 4% increase in dividends.
Telefonica’s recent announcement of downward revisions to dividend expectations has underlined corporates’ ability and willingness to take steps when prospects worsen. Dividend suspensions were a regular feature in 2008-9 with dividends falling for the corporate sector by 17% between 2008 and 2010. Capex fell by 12% in 2009.
Applying similar dividend and capex cuts to 2009/10 suggests corporates have the ability to neutralise the cash-flow impact of an EBITDA shortfall of up to 9% on our 2012 projections. This gives some room for manoeuvre, but may not be enough to insulate corporates from a potential eurozone breakup or a substantial emerging market slowdown, neither of which are Fitch’s base case.
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