What Will Firms Do With All Their Cash?

The stockpiling began in earnest two years ago, and although few noticed, it grew and grew. Indeed, US firms diligently built cash reserves by cutting back on expenses, laying off workers, and slowing down investments, among other measures. Today, S&P 500 firms hold a record-high $2.6 trillion in cash on their balance sheets. The question now is whether a slight recent turnaround in spending will pick up—or be halted by mixed economic signals.

According to Barry Toren, leader of the Financial Officer practice in North America for Korn Ferry, this remarkable pile of cash accumulated due to companies’ reluctance to make major purchases or commit large sums of capital to new projects amid so much economic uncertainty. “A lot of CFOs have been sitting on their hands for the last two years,” says Toren. Indeed, the slowdown in activity was everywhere: The volume of global mergers and acquisitions fell by 27% between 2022 and 2023. During the same period, share-repurchase programs declined by about 15%, and more companies suspended or cut dividend payments than instituted or increased them. Firms also reduced capital expenditure by two-thirds last year. After the torrid growth companies experienced coming out of the pandemic in 2021, Toren says, “everything came to a screeching halt.”

To be sure, activity picked up again in the first quarter of 2024, with global M&A activity jumping 30%. At the same time, announced buybacks reached their highest level since Q4 of 2021. In all, 376 companies announced plans to repurchase shares (during 2022 and 2023, no quarter saw more than 200 companies do so). And 39% of companies increased dividend payments, versus just 13% that decreased them—the highest number of increases in seven years and the biggest gap between increases and decreases in two years. In the view of Jeff Constable, co-leader of the Global Financial Officers practice at Korn Ferry, firms are starting to put money back to work because valuations for acquisition targets and share prices for buybacks are normalizing. “As more certainty comes into the system, more companies will ramp up spending,” he says.

Or will they? What companies do with their cash is directly linked to inflation and interest rates. And recent news that inflation is still hovering above historical averages suggests interest-rate cuts will take longer than anticipated. Experts say CFOs could return to a more conservative approach to cash reserves until there is more clarity. “Companies are likely wondering if prices will go down from here,” says Constable.

Toren says a lot of companies got burned in the aftermath of the pandemic by moving too quickly on deals and other investments. He says CFOs still have “fresh scars” from buying or investing at excessively high valuations. Still, he says, firms are holding too much dry powder—finance-speak for the cash on their balance sheets—to stay on the sidelines much longer. As uncertain as the outlook is now, he says, the tone is significantly upbeat. “They may take a step back again,” says Toren, “but it is only a matter of time before the floodgates open.”

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