How to Buy Back Treasury Stocks

Treasury stock refers to shares that are bought back by a corporation, with the intent of reducing the available shares outstanding. The goal of these transactions is to increase the value of the outstanding stock by increasing earnings per share. The corporation should perform fundamental analysis to determine whether the transaction makes economic sense before going forward with the share repurchase plan. Corporations should explain to shareholders the limitations and rationale for the stock repurchases that creates the treasury stock.

Difficulty: Moderately Challenging

Instructions

Things You'll Need:

• Annual Reports
• Corporate Tax Filings
• Shareholder Contact Information

Executing Share Buyback Plans

1. Set a valuation range for the shares of stock. You do so by researching the performance of the business through its financial reports and tax filings to calculate book value and intrinsic value per share. Book value is defined as assets minus liabilities, divided by the number of shares outstanding. Intrinsic value represents the worth of future cash flows in today's dollars.

2. Compare your valuation calculations to the share prices at which the company is trading in the stock market or over the counter market between individual investors. Share buybacks work best when the corporation can buy stock that is actually undervalued.

3. Set parameters and announce the share buyback plan. The announcement signals corporate intent to purchase a particular dollar amount of its own stock over a set time period, which may last for several months or longer. Large corporations issue press releases or make these proposals at annual meetings. Small businesses may contact shareholders individually and price an offer to buy back stock from owners of the companies because the stock of those small firms is not publicly traded. These share buyback announcements are not legally binding.

4. Buy outstanding stock, which automatically converts into treasury stock when held by the corporation. Publicly traded companies hire brokers to purchase shares within organized stock markets. Small businesses deal directly with shareholders to exchange outstanding stock for cash.

5. The company may cancel the stock, or carry the treasury shares as negative shareholder equity, or contra-equity. The corporation can elect to reissue treasury stock that stays "on the books" at any time. Treasury shares do not pay dividends and have no voting rights.

Tips & Warnings

• Share buyback plans work well in conjunction with employee benefit stock options. Stock options allow employees to purchase additional shares at a set price, which could dilute shareholder equity. Dilution occurs when earnings per share decrease because of newly issued shares. Share buybacks allow the corporation to reduce shares outstanding, reward top management and minimize the effects of dilution.
• Buying back treasury stock is not always the best use of shareholder equity. Shareholders may be better served if corporate officers spend the money to raise dividends, pay down debt and invest in new capital projects. Share buybacks that are put in place simply to avoid employee stock option dilution have no effect upon earnings per share. Further, share buybacks that purchase overvalued company stock have a negative effect upon shareholder returns. You should monitor the treasury stock policy of your business carefully to ensure that management is actually creating long-term value.

References

• Andrew Mickey: Don't Buy Into Share Buybacks
• Investopedia: Treasury Stock
• Dividend Money: Stock Buybacks - Who Benefits the Most?

Resources

• Business Week: Pumping Cash, Not Oil - Exxon Share Buybacks