A company sells shares when it needs to raise capital, to fund its operations, or to pay off debts. But did you know they can repurchase shares from a shareholder? They’re called treasury shares.
What are treasury shares? These shares were once traded but were rebought by the issuing company. Treasury shares are also called treasury stocks. They’re no longer considered outstanding. These shares are also not included in calculating dividends or (EPS).
So why do companies repurchase them? It’s a strategy often used in corporate finance. Treasury shares can influence stock prices, financial ratios, and investor returns. This post details what you should know about them.
Features That Make Treasury Shares Unique
Treasury shares are distinct because they’re repurchased from shareholders or the market. But the company doesn’t retire them. These stocks also have other unique characteristics, like:
- Treasure shares don’t represent ownership in the company. Investors don’t have claims on them. The company holds these stocks so they don’t represent ownership stakes.
- They don’t carry voting rights. A shareholder cannot vote with treasury shares. They’re not considered part of outstanding shares anymore. Treasury stocks can’t influence shareholder resolutions or board elections.
- Companies don’t pay dividends on treasury shares. You’ll only be transferring money within the company if you pay dividends on these shares.
- Companies can retire or reissue them. They do this to raise capital or make acquisitions possible. Companies can also retire these shares. Removing them from circulation reduces the company’s share count.
How Companies Get Treasury Shares
Companies get treasure shares through stock buybacks and forfeited stocks. Let’s break down how companies get treasury socks.
- Buybacks or Share Repurchase Programs
Companies buy back shares from the open market or direct from shareholders. It’s done to reduce the number of outstanding shares and boost stock value.
Many companies also do private negotiations with large investors. They also engage in Dutch auctions. This is when shareholders bid for how much they’re willing to sell their shares. The company will choose a favorable rate to buy back their stocks.
- Forfeited Shares from Staff Stock Plans
Many companies give their employees shares as part of their compensation. These shares could return to the company if employees leave before their shares vest. They can also lose their shares if they fail to exercise their options within a given time.
- Reclassified Unissued Stocks
Companies could also save authorized but unissued shares for the future. They can use these shares to raise capital or to use in employee stock programs. Companies can reclassify them as treasury stocks instead of issuing new shares.
- Legal Settlements or Regulations
There are situations wherein companies must buy back their shares. It’s rare but can happen due to a court ruling or settlement. The government can also order companies to repurchase shares. They do this to correct financial misreporting.
Top Reasons Companies Hold Treasury Shares
Companies buy back shares for various strategic reasons. Here are the top ones:
- Stock Price Stabilization
Companies can boost their EPS by reducing the number of shares in circulation. They make the remaining shares more valuable with this strategy. It also enhances investor confidence and stabilizes stock prices.
- Future Reissuance
Treasury shares are sometimes held for reissuing at a later time. They’re earmarked for stock-based compensation plans, mergers, or acquisitions. Companies can also use treasury stocks to compensate their employees.
- Prevent Hostile Takeovers
Companies can prevent hostile takeovers by buying back shares. It reduces the number of outstanding shares investors can buy. This is one way to stop outside entities from gaining controlling interest.
- Boosts Shareholder Value
Buybacks tell the market the company believes its stock is being undervalued. This move often creates a positive perception among investors. It would drive up the share price.
- Accounting and Tax Benefits
There are also cases wherein treasury shares give tax advantages. They can also help manage financial ratios like EPS and return on equity (ROE).
Treasury shares are a vital aspect of corporate finance. Companies can buy back, reissue, or retire shares for strategic purposes. They can also boost stock prices and financial performance. Investors should understand what treasury stocks are. It would help them check a company’s financial strategy and long-term potential.
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