How does a purchase and reissue of treasury shares affect the total shareholders equity?

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• Treasury stock is stock that a company has repurchased from public investors.
• There are no voting rights or dividend payments associated with treasury stock.
• The amount of treasury stock a company has is reported on its balance sheet.

When you're researching a publicly traded company as a potential investment, you'll often find that they have multiple types of stocks referred to in their financial documents. The types available to you as a public investor are likely to be listed as common or preferred.

You'll see each of those types broken out in the sections of a company's balance sheet detailing shareholders' equity. If the company has done a stock buyback, you might also see another type called treasury stock.

What is treasury stock?

Treasury stock — also called treasury shares — is stock that a company has bought back from public investors. When a company does a stock buyback, it puts the repurchased shares back under its own control and reduces the supply of shares available in the market. That often boosts the price.

After the buyback, the company can cancel the treasury shares or keep them in reserve for potential reissuance or other uses at a later date.  

How is treasury stock different from capital stock? 

Capital stock refers to the amount of shares that a company is authorized to issue to the public under its corporate charter. Depending on the type, investors who own shares of a company's capital stock will have various levels of voting rights, dividend payments, and other benefits. The total amount of a company's capital stock that's available for trading in the market also affects key financial metrics that investors use to evaluate its performance, such as earnings per share (EPS).

Treasury stock is capital stock that has been repurchased by the company that has been removed from trading in the public market. Treasury shares do not allow for voting rights or pay dividends. Therefore, they are not included in the calculation of (EPS) and other metrics.

What happens to treasury stock after a buyback?

When a company decides to buy back shares, it has two options: retire them or hold onto them for other uses. 

Retiring the shares

Why would a company retire shares?

"Having fewer outstanding shares effectively increases the percentage of ownership per share that remains outstanding to shareholders, which can be attractive to many investors," says Faron Daugs, CFP® professional of Harrison Wallace. "Reducing the total potential outstanding shares also effectively reduces the potential need to pay additional dividends on those repurchased retired shares, which could be a drain on the cash flow of a company." 

Retiring shares can also ease investors' concerns that the value of the shares they own might be diluted at a future date if the company decides to reissue them, says Jeff Rose, a CFP® professional and founder of goodfinancialcents.com. 

"Once the shares are retired, they are not permitted to be reissued unless shareholders vote to allow so," Rose says. "When stockholders are confident in the company and stock price, they should hold the stock for the long-term and possibly buy more, increasing the value."

A drawback of retiring shares is that it could make it more difficult for a company to raise money if it needs to at a later time, notes Patrick DellaValle, a director in the banking, insurance, and capital market practice at Guidehouse.

"The disadvantage for retiring treasury stock is that it is a permanent transaction, and once retired cannot be reissued," DellaValle says. "If the firm wanted to raise equity capital, they would need to issue additional shares which would potentially take additional time and incur additional transactions and advisory costs."

Holding onto shares

There are several reasons why companies hold onto shares, including compensating employees, raising capital in the future, or using them for mergers and acquisitions. 

"Of the many advantages, one is using the stock as part of an employee stock compensation plan to reward key employees," Rose says. "Since these stocks are not all issued at once and vest over time, it shouldn't have an immediate impact on the stock price." 

DellaValle adds that companies may hold shares "for use in future acquisition, especially if management sees strong future value as this can provide a solid war chest for acquisitions, which may also offer some tax advantages for acquired companies." 

Companies can also hold shares to "provide a vehicle for raising cash in future periods while capturing increased value," according to DellaValle. "Treasury stock is recorded at the acquisition cost so if the stock is repurchased at a low price and then reissued at a high price the firm would realize additional value from that price increase."

Where to find how much treasury stock a company has

The amount of treasury stock a company has it can be found in its balance sheet. The balance sheet includes the company's assets, liabilities and shareholders' equity. Typically, the amount of treasury stock a company has is included in a line item at the bottom of the equity section, but really it can be included anywhere within the equity section with a debit balance. 

In the example above from The Coca-Cola Company, the treasury stock line is located in the liabilities and equity section under the shareowners' equity heading. It lists the number of shares along with a dollar figure. The dollar amount is shown in parentheses because treasury stock is a contra equity account, meaning it has a negative value.

Information about a company's treasury stock also appears in the consolidated statements of shareholders' equity, as in the example above.

This section provides details on what movements were made and how they changed the shareholders' equity account amounts. It shows the balance of treasury stock at the beginning and end of year, as well as how much treasury stock was issued to employees. 

Why understanding treasury stock is important

While treasury stock isn't something that typically has a direct impact on individual investors, knowing what it is and how it works is important. Companies can use it to protect themselves financially, plan for future mergers or acquisitions, fend off unwanted buyouts, reward employees, or plan for future capital raising needs, among other reasons. 

"Firms that hold a large quantity of shares in treasury could potentially be viewed as having some increased risk of future dilution," DellaValle says. "Investors generally value higher levels of certainty, so while a stock buyback will decrease active shares on a temporary basis, retiring that stock makes that change permanent."

Katie Oelker is a financial coach, personal finance writer, and podcaster. When not working, she enjoys spending time with her family, practicing yoga, and planning her family’s next adventure. You can find her at KatieOelker.com and on Instagram at @katieoelker.

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