- Own shares are shares that a company has bought back from public investors.
- There are no voting rights or dividend payments associated with treasury shares.
- The amount of a company’s own shares is shown on its balance sheet.
When researching a publicly traded company as a potential investment, you will often find that it has multiple types of stocks mentioned in its financial records. The types available to you as a public investor are likely to be listed as common or preferred.
You will see each of these types broken down into the sections of a company’s balance sheet detailing equity. If the company has made a stock buyback, you may also see another type called treasury stock.
What are treasury shares?
Treasury shares – also called treasury shares – are shares that a company has bought back from public investors. When a company repurchases shares, it puts the repurchased shares back under its own control and reduces the supply of shares available in the market. This often drives up the price.
After redemption, the company may cancel the treasury shares or keep them in reserve for possible reissue or other uses at a later date.
How are treasury shares different from share capital?
Share capital refers to the number of shares a corporation is authorized to issue to the public under its charter. Depending on the type, investors who own shares of a company’s capital stock will have varying levels of voting rights, dividend payouts, and other benefits. The total amount of a company’s share capital available for trading in the market also affects key financial metrics that investors use to gauge its performance, such as earnings per share (EPS).
Treasury shares are shares of capital that have been repurchased by the company which has been withdrawn from trading on the public market. Treasury shares do not give voting rights and do not pay dividends. Therefore, they are not included in the calculation of (EPS) and other measures.
What happens to treasury shares after a buyback?
When a company decides to buy back shares, it has two options: withdraw them or keep them for other uses.
Withdrawal from shares
Why would a company withdraw shares?
“Having fewer shares outstanding effectively increases the percentage of ownership per share that remains outstanding for shareholders, which can be attractive to many investors,” says Faron Daugs, CFP® professional at Harrison Wallace. “Reducing the total number of potential shares outstanding also effectively reduces the potential need to pay additional dividends on those repurchased withdrawn shares, which could strain a company’s cash flow.”
Withdrawing shares can also allay investors’ concerns about diluting the value of the shares they own at a later date if the company decides to reissue them, says Jeff Rose, CFP® professional and founder of goodfinancialcents.com.
“Once shares are withdrawn, they can only be reissued if shareholders vote to do so,” Rose said. “When shareholders have confidence in the company and the stock price, they should hold the stock for the long term and eventually buy more of it, which increases value.”
A downside of withdrawing shares is that it could be more difficult for a company to raise funds if they needed them later, notes Patrick DellaValle, director of banking, insurance and capital markets practice. at Guidehouse.
“The downside to withdrawing treasury stock is that it is a permanent transaction and once withdrawn cannot be reissued,” DellaValle said. “If the company wanted to raise equity, it would have to issue additional shares, which would potentially take longer and incur additional transactions and advisory fees.”
There are several reasons companies keep stock, including employee compensation, raising capital in the future, or using it for mergers and acquisitions.
“Among the many benefits, one is using the shares as part of an employee equity compensation plan to reward key employees,” Rose said. “Since these shares are not all issued at once and vest over time, this should not have an immediate impact on the share price.”
DellaValle adds that companies can hold shares “for use in a future acquisition, particularly if management sees strong future value, as this can provide a strong war chest for acquisitions, which can also provide tax advantages. to acquired businesses.
Companies can also hold stocks to “provide a vehicle to raise funds in future periods while capturing increased value,” according to DellaValle. “Treasury shares are recorded at acquisition cost, so if the share is repurchased at a low price and then reissued at a high price, the company will realize additional value from this price increase.”
Where to find the quantity of own shares of a company
The amount of a company’s own shares can be found in its balance sheet. The balance sheet includes the assets, liabilities and shareholders’ equity of the company. Typically, a company’s equity amount is included in a line item at the bottom of the equity section, but it can actually be included anywhere in the equity section with a debit balance.
In the example above from The Coca-Cola Company, the treasury stock row is in the liabilities and equity section under the equity heading. It lists the number of shares with a dollar figure. The dollar amount is shown in parentheses because the redeemed shares are a counter-equity account, meaning they have a negative value.
Information about a company’s own shares is also included in the consolidated statements of equity, as in the example above.
This section provides details of the movements that were made and how they changed the amounts in the equity account. It shows the balance of treasury shares at the beginning and end of the year, as well as the amount of treasury shares issued to employees.
Why understanding treasury stocks is important
Although treasury stocks generally don’t have a direct impact on individual investors, it’s important to know what they are and how they work. Companies can use it to protect themselves financially, plan for future mergers or acquisitions, ward off unwanted takeovers, reward employees, or plan for future capital raising needs, among other reasons.
“Companies that hold a large amount of equity in cash could potentially be considered to have an increased risk of future dilution,” DellaValle said. “Investors generally value higher levels of certainty, so while a stock buyback temporarily reduces active stocks, withdrawing that stock makes that change permanent.”