Treasury Stock

What is Treasury Stock?

The term treasury stock refers to common shares which have been repurchased or reacquired through the open market by the issuing company.  This action will reduce the float, or number of common shares outstanding.  It can also be common shares which were not issued to the public during the initial public offering (IPO) for the purpose of being able to sell the shares at some point in the future when cash is needed.

The amount of treasury stock held by a company can be easily found on the balance sheet as a line item, within the Shareholders Equity section.

There is heavy debate as to whether or not this line item should be listed as an asset on the balance sheet.  It can be readily re-issued in the open market; however, due to the disadvantages listed below, those against listing treasury stock as assets believe they have no added economic impact or benefit which would be required to be defined as an asset

Why Do Companies participate in Stock Buybacks?

A company may elect to buyback shares for a couple of reasons.  Firstly, it may believe that they are undervalued by the market and therefore will buy the shares back with the hopes of re-issuing them at some point in the future when prices are more favorable.  Other reasons include incentivizing employees with company stock rather than cash and buying back enough shares to prevent a hostile takeover bid.

Disadvantages of Treasury Stock

It is important to understand that treasury stock does not carry voting privledges, dividend payments, nor does it have any right to any assets during liquidation.  Additionally, each state will have laws governing the percentage of shares that a company may hold in treasury.

The motives of the company during a buyback should be understood as well.  If the company is buying back stock to positively impact their financial ratios such as the EPS or price to earnings ratio, a company is doing a dis-service to their shareholders as there is an attempt to mislead.