Australian companies have been sitting on a cash pile of almost $40 billion, which is fuelling a spree of acquisitions, buybacks and also record dividends in what is expected to be a bumper earnings season.

According to Morgan Stanley, more and more companies are unwinding capital buffers built up during the pandemic, which had led to $40 billion worth of capital being raised since March last year.

There has been a spate of merger and acquisition activity in the past few months with Seven Group’s $8.8 billion successful bid for Boral, Wesfarmers $687 million offer for Australian Pharmaceutical Industries, an opportunistic $22 billion play for Sydney Airport, which the company has rejected, and a $3.4 billion takeover bid for telco Vocus. The activity remains below pre-pandemic levels but is expected to accelerate in the second half of the year.

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“There’s been a significant build up of excess capital that a lot of companies are now sitting on,” said Alex Dignam head of equity capital markets for UBS Australasia. “There’s been a lot of activity in M&A, but for companies that don’t have obvious acquisition or growth opportunities, I think there will be an expectation from investors that dividends are at a minimum restored to pre-COVID-19 level ...[or] return that excess capital in the form of a buyback or special dividends.”

Last week, Rio Tinto announced a record $US9.1 billion in dividends , while National Australia Bank revealed a $2.5 billion share buyback.

Bell Potter’s Hugh Robertson said he expected more takeover activity in the next six months with growing interest from US companies. “I think the M&A activity is probably only just beginning.”

Cheap interest rates and businesses weakened from COVID-19 are other reasons behind the rise in M&A deals.

Morgan Stanley said giving cash back would be welcomed by investors at a time when the profit outlook for companies could be tempered by the economic uncertainty created by the outbreak of the Delta strain of COVID-19 in Australia .

UBS’s Mr Dignam said capital returns will be the big focus for investors during earnings season, followed by company outlook statements and any signs of inflation.