Treasury stock
The treasury stock is the number of representative shares that a company owns of its own capital stock.
Both listed and unlisted companies can own a portion of their own shares.
We can also speak of treasury stock when a company belonging to a group of companies acquires the securities issued by the parent company.
Treasury stock functions
There are several reasons why a company is interested in having its own shares in its assets:
- Avoid the collapse of the value of the securities of the company. The number of outstanding shares is reduced to minimize the impact on their price.
- Send a signal of optimism about the company. When buying own shares, the image of confidence in the value of the company is given.
- To reward its managers and employees with those actions. In addition to a form of remuneration, it serves to involve them in the results of the company.
- Spread the profit. The repurchase of shares is often considered as an alternative to the distribution of dividends, since it has the same effect.
The purchase of own shares is highly regulated throughout the world. By way of example, current Spanish regulations, through article 134 of the Capital Companies Act, impose a series of obligations on companies when using their treasury stock. In the case of listed companies, they may not have more than 10% of their treasury shares, while the limit of treasury shares for unlisted companies will be 20%. As for listed companies, they will be obliged to inform the National Securities Market Commission about the movements of their treasury stock.
Another of the obligations established by the Capital Companies Law is to have the prior approval of the General Shareholders' Meeting as well as to set the maximum and minimum price for the acquisition of own shares. A requirement that deserves special attention is that transactions with treasury shares cannot exceed 25% of the volume traded in the last 20 sessions.
Treasury shares do not have the right to vote and the right to dividends, although they are computed in the capital for the purpose of calculating the necessary quorum for the constitution of the meeting and the adoption of resolutions.
Example of treasury stock amortization
Company X has its capital stock divided into a total of 1,000 shares, of which we own 10 shares.
The company earned 1,000 euros, so we have a profit of 10 euros (1 euro per share). X distributes 500 euros of dividend, then we are entitled to 5 euros of dividend (0.5 euros per share).
The following year, company X buys 50 own shares and amortizes them. The total number of shares becomes 950, of which we continue to own 10 shares. That same year, company X earns 1,000 euros again, therefore our profit will be increased to 1,053 euros per share (1,000 euros / 950 shares). If company X decides to distribute 500 euros of dividends, we will be entitled to 5.3 euros of dividend.
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