With vaccinations on the rise and the pandemic’s end possibly in sight, economists are raising their U.S. GDP forecasts for 2021. In March, for example, the Organisation for Economic Co-operation and Development (OECD) more than doubled its GDP growth projection for the domestic economy for 2021 (6.5%).

The surge in optimism could leave some to believe corporations will reduce their cash buffers from when COVID-19 first hit. But that’s hardly guaranteed.

Cash holdings ballooned last year. For investment-grade companies, the median cash ratio (a company’s cash and cash equivalents to its current liabilities) was 33.3% at the end of 2020, according to an S&P Global Ratings report. That was far higher than the 19.3% at the end of 2019 but below the 2020 peak of 34.3%.

Companies with lower credit ratings had even higher cash ratios: the median for BB+ or lower companies was 47.9% in the fourth quarter of 2020, compared with 28.1% a year earlier.

A few select industries, like health care, did dip into cash, but they were in the minority. In other industries, cash cushions were much larger than the overall median: the cash ratio for consumer discretionary businesses of 60.2% at year’s end was nearly double the pre-pandemic level of 33.4%.

Investment Questions

“Companies can [now] turn their attention from securing liquidity to unwinding their cash savings,” S&P Global said. That can take the usual forms, including paying down debt accessed during the pandemic’s height; shareholder payments — buybacks or dividends; or capital expenditures.

“We will have a mix of all three based on the company’s particular circumstances, but certainly we don’t expect debt repayment across the board based on those competing interests,” said Gregg Lemos-Stein, global head of analytics and research at S&P.

Anik Sen, head of equities at PineBridge Investments, told S&P that he is confident the prospect of a more predictable business environment, once the pandemic passes, will encourage investment for goals like increasing scale and productivity or adding diversification.

“The majority of firms not intending to invest in either equipment or structures over the next six months cited adequate or excess capacity as the reason,” according to the Richmond Fed analysis.

“There is [also] plenty of pent-up demand and a need to replace obsolescence,” Sen told the credit rating firm.

While there’s some evidence of replacement spending, the recent Richmond Fed CFO Survey found that CFOs’ investment plans were relatively muted, even though fewer CFOs indicated that uncertainty and the need to preserve cash were restraining spending.

Only about one-third of the CFOs surveyed in mid-March anticipated investing in structures or land over the next six months. Nearly two-thirds anticipated spending on equipment in the near term. Still, many CFOs said indeed they were investing to replace or repair existing equipment rather than increase capacity.

“The majority of firms not intending to invest in either equipment or structures over the next six months cited adequate or excess capacity as the reason,” according to the Richmond Fed analysis.

While the $1.9 trillion American Rescue Plan could eventually convince CFOs to increase capacity, they seem to be waiting for now. A majority of the 961 members of the Richmond Fed CFO Survey panel said the law’s fiscal measures would have “little to no impact” across all areas of their business activity — sales revenue, employment, prices, or wages. A smaller share of firms did expect increased business activity resulting from the stimulus, but they indicated the increase would be “modest to moderate.”

M&A Option

Surely, though, some publicly held companies will pull the trigger. Mergers and acquisitions may be a popular option.

Willis Towers Watson’s first-quarter M&A analysis found that despite COVID-19’s staying power, North America’s deals surged by 33% during the first three months of 2021. Two hundred-six deals were completed in the first three months compared with 170 in the first quarter of 2020.

The spread of COVID-19 led to many deals being delayed, but “confidence has returned allied with a more pragmatic and strategic focus on owning the right portfolio of assets for the long run,” said Duncan Smithson, senior director, mergers and acquisitions, at Willis Towers Watson.

In particular, larger medical technology and pharmaceutical companies are expected to use some of their cash to fund M&A transactions.

With financial conditions still uncertain, though, “deal-makers will need to resist the temptation to cut corners on due diligence and take the time to review their targets and understand which levers to pull to maximize growth,” Smithson says.

Buyback Choices

Another option for publicly held issuers? Buying back stock.

Share buybacks, badly hit during the pandemic, are expected to recover in 2021, said S&P Global.

After dropping to a low of $88.6 billion in the second quarter of 2020, stock buybacks rebounded to $130.59 billion in the fourth quarter.

“Big-banks, which received approval [from the Federal Reserve] to resume buybacks, are expected to increase their 2020 expenditure significantly,” wrote Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, in a recent commentary.

Overall, though, buybacks may be less of a priority than they were pre-pandemic: buying back shares when the price is at a 52-week high can be expensive.

And that’s one thing that sitting on cash isn’t right now: expensive.

Said Lemos-Stein: “The opportunity cost of holding cash is not high — that is, holding debt and cash at the same time isn’t that punitive because the cost of debt is so low.”