Treasury Stock News: How Companies Buy Back Their Own Shares

Companies can buy back their own shares, a process known as treasury stock. This can be done through a variety of methods, including open market purchases or tender offers.

Buying back shares can have a significant impact on a company's stock price and overall financial health. For example, in 2020, Apple Inc. repurchased $14 billion worth of its own shares.

Treasury stock can be classified as authorized, issued, or outstanding. Authorized stock is the maximum amount of shares a company is allowed to issue, while issued stock is the actual number of shares outstanding.

Treasury stock refers to shares that a company has repurchased from the open market or from shareholders.

These shares were initially issued to the public but have since been reacquired by the company, and they are now held in the company's treasury.

Treasury stock is no longer considered outstanding, so it doesn't grant voting rights.

It also isn't entitled to dividends.

Companies buy back their own stock for strategic reasons that affect their financial structure.

Treasury stock can be held for future use, such as issuing shares for employee compensation or raising capital when needed.

Treasury stock accounting can be a bit tricky, but it's essential to understand how it affects a company's balance sheet. The basic accounting equation is a great place to start: Assets = Liabilities + Equity.

When a company buys back its own stock, it's called treasury stock, and it can actually weaken the company's balance sheet in the short-term. This is because the company has to pay for its own stock with an asset, typically cash, which reduces its equity by an equivalent amount.

Think of it like paying yourself back a loan - you're using your own money to buy back your own stock, which doesn't exactly strengthen your financial position.

Treasury stock doesn't have much value on its own. It's essentially decommissioned and no longer participates in the company's decision-making process.

These stocks don't have voting rights, which means shareholders can't influence the company's direction. This can be a deliberate strategy to limit outside ownership.

Reacquiring stock can actually help raise the share price, providing investors with an immediate reward. This can be a welcome benefit for shareholders.

A company can choose to hold onto treasury stocks indefinitely, essentially keeping them out of circulation.

When you buy back your own company's stock, you're essentially reducing your equity by the same amount you paid for it. This is because you've used an asset, like cash, to purchase your own stock.

The basic accounting equation shows that assets minus liabilities equals equity. By buying back your own stock, you're reducing your assets and thus your equity.

Paying for your own stock with an asset, like cash, is a straightforward transaction, but it has a significant impact on your balance sheet.

Buying back shares can be a strategic move for companies, making each remaining share worth more. By reducing the number of shares in circulation, a company can boost shareholder value.

With fewer shares floating around, the share price increases proportionally. For example, if a company buys back 4 million shares, the remaining shares will command a higher price than their current market value.

A buyback can also improve key financial metrics, particularly EPS. By reducing the number of outstanding shares, a company can significantly boost EPS, making it appear more profitable.

A company's charter will cite a specific number of authorized shares, which is the amount of stock it can lawfully sell to investors.

Authorized shares are the maximum number of shares a company can issue, but it may choose to sell fewer shares to investors.

The shares actually sold to investors are referred to as issued shares, and this number is often lower than the authorized number.

Issued shares are the shares that have been sold to investors, but the number of outstanding shares is used to calculate key metrics like earnings per share.

Outstanding shares are the portion of stock currently held by all investors, and this number is used to calculate key metrics like earnings per share.

The number of issued shares and outstanding shares are often the same, but if a company performs a buyback, the shares designated as treasury stock are issued, but no longer outstanding.

The number of outstanding shares can significantly impact key financial metrics, particularly earnings per share, which is calculated by dividing net earnings by the number of outstanding shares.

Buying back shares can be a strategic move for companies to boost shareholder value. By reducing the number of outstanding shares, each share becomes worth more.

For example, Upbeat Musical Instruments Co. had 10 million shares outstanding trading at $30 per share, but after buying back 4 million shares, its earnings-per-share figure jumped from $1.50 to $2.50.

The remaining shares will command a proportionally higher price than its current market price. This is because fewer shares are floating around, making each share more valuable.

Companies may have other motives for consolidating ownership, such as offering stock options to skilled executives as part of their compensation package.

By accumulating treasury stock, companies can make good on these contracts down the road. This can be a way to attract and retain top talent.

Buying back shares can also be a defensive strategy for businesses targeted for a hostile takeover. With fewer shareholders, it becomes harder for buyers to acquire the amount of stock necessary to hold a majority ownership position.

This can give the management team a stronger negotiating position and potentially protect the company from unwanted takeover attempts.

Buying back shares can improve key financial metrics, particularly EPS, which is calculated by dividing net earnings by the number of outstanding shares.

A lower number of outstanding shares can significantly boost EPS, making the company appear more profitable, even if overall earnings remain constant.

Repurchasing shares can also result in a gain, as seen in the case of Upbeat, where the company sold treasury stock at a profit of $48 million.

This gain is credited to an account called "Paid in Capital—Treasury Stock", which can help improve a company's financial performance.

By reducing the number of outstanding shares, companies can drive up earnings per share and increase stock value, making it an attractive strategy for those looking to reward investors.

This can also signal confidence from management and protect the company against hostile takeovers, giving shareholders a clearer picture of its long-term potential.

Signaling confidence is a key aspect of treasury stock, and it's done by repurchasing shares. This tells the market that the company thinks its shares are undervalued, which can boost investor confidence.

Repurchasing shares sends a strong signal to the market that the company is in good financial health. This can positively impact the stock price, making it a smart move for investors.

Having treasury stock gives companies flexibility in managing their capital structure. They can reissue shares in the future for various purposes, such as employee stock option plans or acquisitions.

By holding shares in reserve, companies can avoid having to issue new shares. This can be beneficial for maintaining control and avoiding dilution of ownership.

Signaling confidence and having flexibility are two key benefits of treasury stock. They can help companies navigate changing market conditions and make strategic decisions about their capital structure.

Let's take a closer look at how treasury stock works with an example. Brilliant Corporation initially issued 10 million shares to the public at a price of $50 per share.

These shares were bought by the public, not by the company itself. The company later repurchased 2 million shares at a price of $60 per share.

This repurchased amount is now held as treasury stock, no longer counting as outstanding shares. It won't be included in the calculation of earnings per share (EPS) or dividends.

The company can hold onto these shares for future use, like reissuing them to employees as part of a stock option plan. Alternatively, it may choose to retire them altogether, permanently reducing the number of shares in circulation.

On Brilliant's balance sheet, the treasury stock would be recorded as a reduction in shareholders' equity, reflecting the company's expenditure of $120 million (2 million shares x $60).

Reducing the number of outstanding shares can serve a variety of important goals, from preventing unwanted corporate takeovers to providing alternate forms of employee compensation.

Acquiring treasury stock can significantly affect a company's financial figures, particularly in terms of key line items on the balance sheet.

By reducing outstanding shares, a company can prevent unwanted corporate takeovers, giving management more control over the direction of the business.

This can also provide alternate forms of employee compensation, such as stock options or employee stock purchase plans.

For an active investor, understanding the impact of treasury stock acquisition on financial figures is crucial for making informed investment decisions.