Treasury stock, often referred to as treasury shares or reacquired stock, represents shares of a company’s stock that were initially issued to investors and subsequently repurchased by the company itself. These repurchased shares are held in the company’s treasury, which is why they are called treasury stock.
Key points to understand about treasury stock include:
- Repurchase: Treasury stock arises when a company buys back its own shares from existing shareholders. This can be done for various reasons, including to support the stock price, use in employee stock option plans, prevent hostile takeovers, or for potential acquisition purposes.
- No Voting Rights: Typically, treasury stock has no voting rights in the company. This means that these shares do not have a say in corporate decisions, such as the election of the board of directors.
- No Dividend Entitlement: Holders of treasury stock do not receive dividends. The company does not pay dividends on its own shares. This is because the company’s ownership of these shares essentially cancels out the need to distribute dividends to them.
- May Be Retired or Reissued: Companies have the option to retire treasury stock, which permanently removes these shares from circulation. Alternatively, they can reissue treasury stock in the future, essentially putting them back into the pool of outstanding shares.
- Impact on Earnings per Share: The existence of treasury stock affects the calculation of earnings per share (EPS). Companies typically use the number of outstanding shares, which excludes treasury stock, when calculating EPS. This can result in a higher EPS figure because it reduces the denominator (the number of outstanding shares).
- Balance Sheet Treatment: Treasury stock is recorded on the company’s balance sheet as a reduction in shareholders’ equity. It is listed as a negative number under shareholders’ equity because it represents a reduction in the total value of shares outstanding. When treasury stock is retired, its par value is removed from the common stock and additional paid-in capital accounts.
In summary, treasury stock represents a unique category of shares that have returned to the company’s possession. These shares do not have voting rights and do not receive dividends, and their treatment can affect financial metrics like earnings per share.