European companies have never been richer, according to Morgan Stanley , and are ready to splash the cash — including distributing part of it to shareholders. The Wall Street bank has named a raft of stocks that have strong balance sheets and resilient cash flows and are set to return excess cash to shareholders through buybacks and dividends. “With much uncertainty and MSCI Europe down 13.5% year-to-date, strong balance sheets, sufficient liquidity and resilient free cash flow are the focal points for investors,” Morgan Stanley’s strategists, led by Todd Castagno, said on Jun. 17. “Companies with such attributes should be able to weather any prolonged storm, deploy capital effectively and seize opportunities that come along the way,” they added. Now the MSCI Europe is sitting even deeper in the red. The index is down more than 20% for the year and could still see further downside as central banks around the world hike interest rates to rein in soaring inflation. With the stock market a tough hunting ground at the moment, Morgan Stanley has sought to draw up a list of stocks with strong balance sheets and attractive shareholder returns. “With much uncertainty and volatility, investors tend to return to fundamentals, the most basic of which are cash and free cash flow. Cash levels are a good indicator of how companies perceive the business environment and uncertain times tend to lead to a rise in cash,” Castagno said. The bank noted that MSCI Europe corporates collectively hold about 1.2 trillion euros ($1.26 trillion) in cash as of the first quarter of this year, with nearly half of the companies reporting an increase in cash and cash equivalents from the same period a year ago. Strong balance sheets Morgan Stanley screened for companies with “sufficient cash to run operations and service debt; and … [the] ability to meet long-term obligations with relatively comfortable gearing, leverage and interest coverage.” The stocks that turned up on the screen include technology consulting firm Capgemini , food catering giant Compass Group , food conglomerate Nestle , Ferrari , Airbus and luxury behemoth LVMH . All are rated overweight by the bank. Read more These low volatility, dividend-paying global stocks are beating the market — and could go higher Goldman Sachs says these global companies are poised to return more cash to shareholders These beaten-down global tech stocks have strong fundamentals — and analysts love them Resilient cash flows Morgan Stanley also likes companies with resilient free cash flow. Free cash flow — cash generated by a business after accounting for operating and capital expenditure — is viewed as a measure of financial health and profitability. It is an important measure of the amount of capital that can be returned to shareholders via dividends and/or buybacks. “Cash rich companies with high free cash flow yields should also have better downside protection, while providing upside potential if management is able to deploy its cash effectively,” Castagno said. The bank screened for stocks that are expected to grow their free cash flow by more than 7% over the next two years. The stocks are also expected to grow their return on invested capital — a measure of how well a company is using its capital to generate profits measures — by more than 10%. The overweight-rated stocks that turned up on the bank’s screen include oil majors BP and Shell , shipping company A.P. Moller-Maersk , mining group Rio Tinto and delivery firm Deutsche Post . Attractive total return Companies can return capital to shareholders in different ways, including through dividend payouts and share buybacks. Share buybacks are when a company buys back its own shares from the stock market. This boosts the company’s earnings per share, given the smaller pool of shares outstanding, possibly enhancing the value of the stock. Morgan Stanley noted that there has been an acceleration in net buybacks and dividends over the past 12 months, with 397 billion euros returned to shareholders during that period. That’s a 66% increase from a year ago, the bank noted. “Companies with sustainable cash flow could take advantage of suppressed valuations and accelerate shareholder returns,” Castagno said. Stocks that turned up on the bank’s screen of stocks with attractive total shareholder returns include mining firm Glencore , insurer AXA , French supermarket chain Carrefour , German specialty chemicals firm Evonik, French tire manufacturer Michelin and German industrial conglomerate Siemens . Just two stocks appeared on all three screens — automaker Stellantis and Norwegian renewable energy firm Norsk Hydro . Both stocks have strong balance sheets, resilient cash flows and offer an attractive total return, according to Morgan Stanley.