|This article is of interest to the following WikiProjects:|
When a company buys back shares and does not plan to reissue them. Can the treasury stocks get written off on their books? —Preceding unsigned comment added by 18.104.22.168 (talk) 16:41, 28 February 2008 (UTC)
Does $1 of "buybacks" give as much return to shareholders as $1 of dividends?--Jerryseinfeld 03:47, 31 Dec 2004 (UTC)
I'd say the answer to this is a definite not-necessarily. However, in theory, the answer is yes. Say a company pays $1/share cash dividend on 100,000 shares outstanding, each share worth $50 on the open market. To make things easier, let's say that there is only one shareholder, meaning that he gets $100,000 in cash dividends. If the company were instead to use that $100,000 to buy back stock, the company would be able to repurchase 2,000 shares ($100,000 available / $50 FMV).
Remember that total amount invested by investors is 100,000 shares outstanding x $50/share fair value, or $5 million. The buyback should mean that less ownership is available in the hands of shareholders--by exactly $100,000, the amount paid to investors for that ownership. The price of the stock should not change, because in an ideal world, the company's net assets should only be worth $4.9M now (decreased by the payment of $100,000 to investors, and reflected in the open market by: 98,000 shares outstanding x $50/share).
If a cash dividend was declared instead, the company's net assets should decrease as well by $100,000. However, since the company's net assets are only worth $4.9M, the fair value of the outstanding shares should fall to $49/share, giving us the $4.9M ownership held by our investor. Hence, as this shows, whether it's a cash dividend, a buyback, or even stock dividends, there should be no "return" on investment. The net effect is zero. If you get a $100,000 in dividends, your investment value should fall by that $100,000.
However, that is only in an ideal world. The stock market is anything but rational. And even if it were possible to make it, it would be very difficult to know what the true fair market value of assets/companies should be. It all falls down to perceived worth. And what's better for the investor?...well that's up for debate.
I would love comments! --RoshSok 21:40, 24 February 2007 (UTC)
Interesting perspective. However there is another important factor regarding share buybacks. Buybacks lead to higher EPS as there are fewer shares outstanding. Higher EPS is an attractive number for a prospective buyer of stock. With fewer shares outstanding, higher EPS should lead to a lower P/E (assuming constant price), which would be more attractive to value oriented investors. Again this is all theory.
It is also important to remember the "signals" that a company is sending via their actions. For instance, a buyback sends a strong signal that management believes shares are (perhaps) undervalued, whereas a dividend (is usually) interpreted as management doesn't have a use for extra cash (they don't have any investment opportunities on the horizon), so they "give" it to shareholders. My "gut" belief is that if I'm a long term shareholder, I'd prefer the dividend so I can reinvest it. If I have a short term holding period, I'd take the buyback and hope for a jump in share price, so I could sell. The bottom line is it depends on the company in question and the overall economic climate. Hope this helps a little. 22.214.171.124 (talk) 21:28, 29 February 2008 (UTC)
Methods of Accounting For Treasury Stock
First of all, the section talking about the two methods of accounting for the purchase of treasury stock should be broken off under its own subheading. Also, the entire article needs a rewrite. It feels like twenty different voices speaking instead of being a unified article (as is the problem with most wiki articles)
More importantly, the cost method (and I believe even the par method) is wrong. When a company's own capital stock is repurchased using the cost method, additional-paid-in-capital (APIC) is not hit. The entry very simply is:
Dr. Treasury stock (at cost)
That's it. Treasury stock is a contra-equity account, and Issued common stock is netted against this account to provide Outstanding common stock. The cost method is by far the most popular method. Once sold, the treasury stock is credited to remove it off the books, cash proceeds is debitted, and any difference between the two is squeezed to APIC.
The par value method is used about 5% of the time (according Becker/Convisor CPA Review from what I remember), but is still GAAP. The par value does hit the APIC account, because, as the name suggests, treasury stock is increased not at the purchase price (or cost), but at the stocks par value (which is usually much less than cost). Because the difference between par value and cash actually received when initially sold went to APIC, it must be removed from the books when repurchasing. The entry would be:
Dr. Treasury stock (at par)
Dr. APIC (exact amount when sold)
Dr. Retained earnings (squeeze--explained below)
Cr. APIC (squeeze-explained below)
In addition, if the treasury stock was purchased higher than what the stock was initially sold for, the difference is credited to APIC (thus offsetting APIC in the above entry). If the amount paid is actually more, then retained earnings is debitted for the difference instead.
To sell T/S using the par value, it is very similar to the cost method. T/S is removed by creditting the account, cash is debitted, and APIC is squeezed for the difference (even if R/E was hit for the purchase).
Any questions or comments, I'd love to hear. I don't think I got anything wrong, but it sure is possible.
--RoshSok 21:10, 24 February 2007 (UTC)
What shall the parent company do if it's subsidiary buys back some of the stocks as treasury from non-controlling interests?
As I know, if a subsidiary uses retirement method for treasury stock, the parent company have to adjust it's investment account accordingly. For example:
A subsidiary has 10,000 shares outstanding and has a total stockholders' equity of $240,000. The parent company P owns 7,000 shares prior to the purchased of 2,000 noncontrolling shares by the subsidiary for $52,000. The purchase changes the parent's interest to 87.5%. The parent's change in equity would be as follows:
parent interest prior to retirement, 70% * $240,000 equity $168,000 parent interest after retirement, 87.5% * ($240,000 - %52,000) $164,500 Adjustment $3,500
So the adjustment entry would be:
Paid-in capital 3,500 investment 3,500
But what shall the parent do if the subsidiary uses cost method? For example:
For example, the company S issues 10,000 shares of $10 par at $15. S has the following stockholder's equity:
capital stock ($10 par) $100,000 paid-in capital in excess of par 50,000 retained earnings 90,000 total stockholders' equity 240,000
Then, S purchases 2,000 of it's 10,000 outstanding shares. The following entry then was recorded by the company S as a result of this purchase from noncontrolling shareholders at a cost of $26 each.
treasury stock (at cost) 52,000 cash 52,000
What shall the parent company do at this moment? Does it have to adjust the investment account as well? —The preceding unsigned comment was added by Wyweiyao (talk • contribs) 10:11, 14 March 2007 (UTC).
Who owns Treasury stock? I am under the impression it is the company (thus the company is technically owning a piece of itself), but the article is unclear on that point, and the lede gives the impression that other people (e.g. employees) can own treasury stock. "Rather than receive cash, recipients receive an asset that might appreciate ..." makes it sound like treasury stock is the asset they receive. -- 22:13, 11 December 2007 (UTC)
When a corporation seeks to buyback a large quantity of shares, how does it actually acquire those shares? The article notes the rules applicable in the U.S. regarding brokers, timing, and price, but who do the shares come from? Essentially, does the shareholder have to be willing to sell his/her shares or does the company have the ability to force the sale? What happens if shareholders want to hold on to their stock? Is the corporation's buyback attempt thwarted?
Or, does a company decide that it will spend a certain amount of money in order to buyback as many shares as possible and then simply buy the shares at the market rate? (Such as Amazon's announced $1 Million buyback on Feb. 8, 2007.) In which case the number of shares bought will depend on how much they are willing to spend? Referencing the Trading section of the Stock Market page, does the company make a bid or does it order purchases at market?
I disagree with much of the article, but at least I can answer this question. In the US, the company doesn't have the right to force the sale: it merely goes to the market and buys shares from whatever stockholders make an offer to sell. The transactions are effectively at market price. (In the US, the company is allowed to bid a price lower than the market quotation, but not higher). —Preceding unsigned comment added by 126.96.36.199 (talk) 17:04, 1 September 2008 (UTC)
The EMH example may need to be reconsidered in light of the impact of effective supply changes through brokerage hypothecation or institutional securities lending. From a pure reporting standpoint more investors think they own the stock so it will depend on how you measure stock outstanding.. is it the actual total number of shares issued or the number of shares reported by brokerages (including margin positions) and institutions including shares reported without "Sole Ownership". If lent shares are allowed to be reported as positions to investors either directly or indirectly should not the total effective supply be considered increased after a stock is borrowed and lent out? If so then wouldn't it follow if company buys back 100 shares and happens to buy back from an entity that lent them out(either knowingly or unwittingly) that this triggers a recall and forces the borrower to return the shares borrowed and if that borrower needs to buy to cover the recall another 100 shares are bought back reducing the effective supply of stock not by 100 but by 200 shares... this process can be recursive if a recall triggers another recall. A heavily shorted stock therefore can have already experienced a dramatic increase in effective ownership as defined by folks who think they own the stock (directly or indirectly) and when a company the company buys back stock in this environment it can either target the lenders through dark pools knowing they will trigger recalls or they can randomly encounter one that can reduce that effective supply of stock more than 1 to 1 as described in the wiki. — Preceding unsigned comment added by Sidneyleejohnson (talk • contribs) 23:10, 7 December 2012 (UTC)
The article notes, "A company cannot own itself." Is there anything that forbids a company from returning all shares to treasury? Practically, I can see some problems with this (the company could not afford to buy out the last remaining shareholder). But hypothetically speaking, is there any reason why it cannot be done? Robert K S (talk) 01:43, 11 December 2012 (UTC)