Why companies are hoarding cash (and what it means for investors)

Morgan Stanley's Counterpoint Global publishes a series of thought leadership reports called the Consilient Observer. They're typically US centric, but offer unique perspectives to help investors understand long-term opportunities and risks.

The latest Counterpoint report takes a closer look as to why corporate America is sitting on a growing pile of cash and whether that's prudence, optionality or a sign of lost ambition.

According to the report, US non-financial companies ended 2024 with around 9% of total assets in cash and short-term investments, up from a long-term average of 7.5% between 1970 and 2024. While that’s below the post-pandemic peak of about 11.5%, it remains historically elevated, perhaps a sign that the era of “just-in-case” balance sheets hasn’t gone away.

Source: Counterpoint Global

Companies in other countries often hold even more cash than those in the US. The top 20 countries (measures by stock market capitalisation) average 12.2% of assets in cash, with a median of 10.8%. Taiwan ranks the highest at 23.2%, while Australia sits at the bottom with 7.5% cash.

The rise of the liquid balance sheet

Corporate cash holdings have climbed steadily since the early 2000s, reflecting deeper structural change rather than temporary caution. In the 1970s through to the dot-com era, the average firm held roughly 5-6% of its assets in cash. In the two decades that followed, that figure rose to nearly 10%.

Morgan Stanley attributes the shift to the rise of intangible-heavy business models such as software, biotech and fintech, which lack the physical collateral that makes debt financing easy. These companies lean on internal funding and equity rather than leverage, naturally building up bigger cash cushions.

The distribution of that cash is far from even. Of the roughly US$2.1 trillion in what the bank calls “excess corporate cash”, a quarter is held by just ten companies and half by only 67.

Tech and healthcare dominate the list. In 2024, the median cash-to-asset ratio was about 39 per cent in healthcare and 23 per cent in information technology, compared with just 4 per cent for energy and less than 1 per cent for utilities.

Source: Counterpoint Global

In other words: the more intangible the assets, the thicker the cash buffer.

The motives: prudence, power or politics

Why do companies hold so much cash?

The classic precautionary motive, keeping a buffer against uncertainty or funding constraints, remains the most cited. It proved its worth during COVID, when liquidity decided which firms could outlast shutdowns.

But the story has evolved, as cash also offers the ability to move fast on acquisitions or pivots without tapping volatile capital markets. In an age when M&A windows open and shut quickly, liquidity is power.

Tax and regulation play a role too. Before the US tax overhaul in 2017, multinationals hoarded foreign earnings offshore to avoid repatriation taxes. Those incentives have faded but haven't vanished. Cash still tends to accumulate in lower-tax jurisdictions or in entities that can deploy it flexibly.

And finally, there's the agency motive, less flattering but equally real. Executives like the comfort of a large war chest. Research shows that public companies consistently hold about twice as much cash as comparable private firms, a gap Morgan Stanley partly attributes to management's desire for safety and autonomy.

What they do with it

Once a company hits its internal liquidity target, the question becomes what to do with the excess. Between 1970 and 2024, about 87 per cent of corporate capital came from internal operations, 22 per cent from net new debt, while net equity issuance was negative, meaning companies bought back more stock than they issued.

Buybacks have now eclipsed dividends as the dominant way to return capital to shareholders, a shift that becomes clear when looking at the numbers from 2000 to 2024, during which US firms issued roughly US$10 trillion in new equity, mostly to fund acquisitions, but spent nearly US$15 trillion on buybacks.

Buybacks have become a flexible means of returning capital (unlike the commitment required for dividends) and look good to the market. Executives often justify them by pointing to earnings per share growth or the need to offset stock-based compensation. Yet as Morgan Stanley cautions, buybacks executed at inflated valuations can destroy long-term shareholder value, making timing crucial.

(I don't want to name names but a certain burrito business just announced a $100 million buyback as the stock trades at FY25 PE of 190x)

The investor lens

For investors, a large cash pile isn't inherently bullish or bearish but depends entirely on the context. In cyclical industries, high liquidity can shield against downturns, while in high-growth sectors, it can fuel opportunistic growth. When cash sits idle, however, it drags on returns and may hint at weak governance or a lack of strategic direction.

There's also a lifecycle dimension worth considering, as younger firms, still scaling or unprofitable, typically carry higher cash ratios as a survival buffer. But as they mature, those balances should fall and shareholder payouts should rise. If a company's cash continues to swell deep into maturity, that could signal a red flag for investors, suggesting management may be hoarding resources rather than deploying them effectively.