Treasury Stock

[Blake Hampton]

I thought when a company bought back stock, that the shares bought were instantly deducted from the total amount of common stock outstanding. Apparently a company can continue to hold onto these shares as treasury stock, for some reason I didn't know that. I wanted to make sure by asking, does it make sense to deduct treasury shares from common stock outstanding, so that I can then calculate a more representative market cap? What are the primary purposes for a company to do this, and I was also wondering if any of you have additional insights on the topic?

[Dinar]

1 hour ago, Blake Hampton said:

I thought when a company bought back stock, that the shares bought were instantly deducted from the total amount of common stock outstanding. Apparently a company can continue to hold onto these shares as treasury stock, for some reason I didn't know that. I wanted to make sure by asking, does it make sense to deduct treasury shares from common stock outstanding, so that I can then calculate a more representative market cap? What are the primary purposes for a company to do this, and I was also wondering if any of you have additional insights on the topic?

Shares issued and outstanding = Shares issued - shares held in treasury.  Yes, you should only use shares issued and outstanding.  There could be various reasons for holding treasury stock, including for stock option exercises or restricted stock units.  Many European companies only cancel shares once or twice a year.  

[Blake Hampton]

3 hours ago, Dinar said:

Shares issued and outstanding = Shares issued - shares held in treasury.  Yes, you should only use shares issued and outstanding.  There could be various reasons for holding treasury stock, including for stock option exercises or restricted stock units.  Many European companies only cancel shares once or twice a year.  

Thanks

[gfp]

Some companies cancel the stock, some don't.  Apple cancels it.  Berkshire holds all the shares they have repurchased as treasury stock.  They could easily use it as merger consideration in the future if they desired.  The treasury stock is not outstanding and doesn't get voted by management.  The other variation is the GAAP "treasury stock" at Biglari Holdings, where the company indirectly owns several hundred million dollars of its own shares through an LP investment, where management does vote the shares but they are eliminated from the GAAP financial statements as look-through treasury stock.  This unusual arrangement causes many market participants to incorrectly compare the market cap using one share count to the published balance sheet.

 

If you leave the balance sheet entry for Treasury stock (at cost) it can provide an easy to judge record of accumulated share repurchases over the years.  If repurchases flip shareholders equity negative it can make the relationship more apparent at a glance.

 

Apple, for instance, will likely flip to negative shareholders equity some time in the next few years.  They publish a separate document that shows what Berkshire's 'Treasury stock, at cost' line item conveys -

https://s2.q4cdn.com/470004039/files/doc_earnings/2024/q4/generic/Q4-24-Return-of-Capital-Timeline.pdf

Edited December 31, 2024 by gfp