By Nina Trentmann 

European companies are reporting higher revenues and profits as the continent benefits from the fastest pace of economic growth in a decade, prompting corporate executives to increasingly mull deal making and raise dividend payouts.

As of Friday more than half of the 294 companies in the Stoxx Europe 600 index that have reported quarterly results beat analysts' earnings expectations, according to JPMorgan Chase & Co. This is roughly in line with the prior reporting period and the comparable time frame a year earlier. Earnings per share are up 16% year-over-year, with companies in the energy, materials and consumer-discretionary sectors seeing strong gains.

"More and more companies are beating expectations," said Emmanuel Cau, an analyst at JPMorgan. "The quality of earnings is good, both the top-line and margins are driving growth."

French cosmetics giant L'Oréal SA said its operating margin reached a "record level" of 18% of sales in the past quarter. "What we see is a healthy, growing market," Chief Executive Jean-Paul Agon said during a Feb. 9 earnings call.

German industrial giant Siemens AG said orders rose 14% to EUR22.5 billion ($27.9 billion) in the past quarter, while revenue was up 3% at EUR19.8 billion. CEO Joe Kaeser said during an earnings call last month that investments in key businesses and sectors were paying off.

The strong corporate performances come after years of anemic economic growth during which many European companies repaired their balance sheets by shedding underperforming assets and cutting costs.

The eurozone economy expanded by 2.5% in 2017, the highest figure since 2007, when it grew by 2.7%, statistics agency Eurostat said Wednesday. The streak will continue in 2018, according to a forecast by the European Central Bank, which in December predicted the currency bloc's economy will grow at a 2.3% clip this year. "We are more optimistic, confident and determined than ever," L'Oréal's Mr. Agon said.

That optimism is also fueling expectations of more corporate spending. European firms will ramp up mergers and acquisitions this year, as well as spending on dividends and stock buybacks, JPMorgan's Mr. Cau said.

"Companies are doing this when they can afford it and feel comfortable about the future," Mr. Cau said. "All the key drivers of expansion are in place."

European companies have struck several deals since the beginning of the year, including Sanofi SA's proposed takeover of Bioverativ Inc. for more than $11.5 billion. Swiss industrial firm ABB Ltd. is on the hunt for mergers and acquisitions, said CEO Ulrich Spiesshofer during a Feb. 8 earnings call. Danish insulin maker Novo Nordisk A/S is scouting acquisitions in several markets including the U.S., outgoing CFO Jesper Brandgaard said in early February.

Deal making could also get a boost from low financing costs. Unibail-Rodamco SE, a Paris-based operator of luxury shopping malls, reported its cost of debt in 2017 fell to an "all-time low" of 1.4%. Unibail in December struck a deal to buy Australia's Westfield Corp. for $16 billion.

Other companies are spending more cash on dividends. German sportswear maker Puma SE has proposed to pay a one-time dividend of EUR12.50 per share later this year. This comes after annual revenue exceeded EUR4 billion for the first time in the company's history last year. L'Oréal plans to raise its dividend by 7.6% to EUR3.55, following sales growth across all of its divisions. Daimler AG also wants to boost its dividend, said Chairman Dieter Zetsche during the car maker's most recent earnings call.

But the euro's rally against the dollar could sap optimism, companies and analysts say. The common European currency surged 16.3% year-over-year against the dollar, according to FactSet. The foreign exchange swing impacts a range of industries and in part explains why European companies still lag their U.S. counterparts, Mr. Cau said. "Whoever is trading overseas cares about the stronger euro," he added.

Pernod Ricard SA, the maker of Beefeater gin and Absolut vodka, expects operating profit to be around EUR180 million lower in 2018 because of currency effects, CFO Gilles Bogaert said.

Danish brewer Carlsberg A/S said its 2017 earnings before interest came in below forecasts because of currency effects. "It all relates to the strengthening of the euro," finance chief Heine Dalsgaard said on a Feb. 7 call, according to a transcript.

In some European countries, companies have come under pressure to increase salaries following years of little or no wage inflation. German labor union IG Metall and the Südwestmetall employers' federation earlier this month struck a deal for a 4.3% pay rise for industrial employees starting in April. The agreement covers companies like Daimler.

Still, large European companies are well-positioned to master these challenges, said JPMorgan's Mr. Cau. "I think that corporates are used to navigating these headwinds," he said.

Write to Nina Trentmann at Nina.Trentmann@wsj.com

 

(END) Dow Jones Newswires

February 19, 2018 06:39 ET (11:39 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.
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