Everything You Wanted To Know About Treasury Stocks
Introduction
A company issues stocks to investors for various purposes. However, sometimes, they buy back their own stocks. This could be for several reasons. When they do so, these stocks become treasury stocks. This blog sheds light on various aspects of treasury stocks that will help you know them better.
What are treasury stocks?
Treasury stocks refer to stocks that a company buys back from its shareholders. The company holds them and may dispose of them if it wants. The company can also sell them in the future. These stocks remain in the company’s possession. If it retires them, they are out of the market forever. These stocks are also known as reacquired stocks.
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Note that the number of shares a company can buy back from shareholders is restricted. The regulatory authority allocating them to companies governs the restriction.
Ways through which companies buyback stocks
The various ways through which companies buyback stocks are as follows:
- Direct purchase
This is the simplest method by which companies buy back stocks. It is also known as an open market operation. Here, companies buy stocks directly from the exchange.
- Tender offer
This is another way companies can buy back stocks from existing shareholders. In this method, the company buys stocks at a specific price it’s willing to pay for a particular period. Once the company releases the tender offer, shareholders willing to sell their shares may tender them within the due date.
- Dutch auction
Dutch auction is the third route to buyback stocks. Here, the company announces its willingness to buy back the stocks, the price range within which it wants to repurchase them, and the date range for which the offer is valid.
Features of treasury stocks
Now that you know the meaning of treasury stocks, let’s look at their various features. Some distinctive features of treasury stocks are as follows:
- No voting rights
Treasury stocks don’t enjoy voting rights. Generally, when you acquire a company’s outstanding stocks, you enjoy voting rights. However, this is not possible with treasury stocks.
- No dividends
Another significant feature of treasury stocks is that they don’t pay dividends. In other words, the company doesn’t distribute its profits among shareholders, which can impact overall earnings.
- Not outstanding any longer
Treasury stocks are no longer considered outstanding. When a company repurchases them, they are taken off the market. These stocks are recorded in the balance sheet as contra-equity accounts, thereby reducing total shareholder equity.
Benefits of treasury stocks
Treasury stocks spell benefits for companies. These include:
- Maintain control
Companies actively use treasury stocks to maintain control and prevent dilution of ownership. By repurchasing shares and holding them in treasury, companies reduce the number of outstanding shares, bolstering their ownership stake in the business. This strategic move helps them guard against the potential dilution of ownership from issuing new shares.
- Utilised for employee benefits
Companies can use treasury stocks as employee stock-based compensation plans, a form of remuneration. This enables them to reward employees with equity in the company, aligning their interests with those of shareholders. This way, they can preserve cash while providing employees valuable incentives.
- Support stock prices during market meltdown
Repurchasing stocks can be a prudent way to support stock prices when markets are down, giving investors confidence. By actively buying back shares, companies demonstrate their belief in their stock’s underlying value and commitment to maintaining shareholder value. This action helps stabilise stock prices during market volatility periods, thus reassuring shareholders and attracting new ones.
- Help in mergers and acquisitions
Treasury stocks can play a crucial role in mergers and acquisitions. Companies can use them as a strategic asset during acquisitions as currency for purchasing other businesses. This can be advantageous as it allows them to preserve cash while still offering a valuable form of consideration to target shareholders.
- Guard against hostile takeovers
Companies may sometimes repurchase shares and hold them as treasury stock as a defence mechanism against hostile takeovers. By reducing the number of outstanding shares, the company can make it more difficult for external parties to acquire a controlling interest, thereby protecting the interests of existing shareholders.
Summing it up
Treasury stocks are a vital tool for companies. They provide them with growth opportunities. By repurchasing their shares, firms can boost shareholder value significantly.
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