What Happens to Buyback Stock

Jan 28, 2024 By Triston Martin

Companies often repurchase their stock for various reasons, one of which is to increase the price of the company's shares. A few options are available for the company's shares once it has completed a buyback of those shares. One option is to keep those shares after a repurchase and then resale them to the general public to generate cash. Additionally, they might be used in the purchasing of other businesses.

Additionally, such shares might be retired by the firm, resulting in a permanent reduction in the total number of active shares. Because of this, each active share would stand for a bigger ownership position in the company for each investor. This indicates that they would be entitled to a larger portion of the dividends and profits after considering both the basic and diluted earnings per share.

The Pros and Cons of Share Buybacks

Neither of the two possible courses of action is preferable to the other. Success can be achieved with either strategy if a stock distribution is carefully overseen. Teledyne Technologies's stock repurchase program is a good example of the effective use of buybacks in the real world. During his time as both founder and CEO, Henry Singleton made excellent use of the company's treasury stock. He boosted the genuine worth of the stock for owners who had been with the company for a lengthy period. When the price of the company's shares was low, Singleton purchased more stock. When he believed the stock was overpriced, he distributed it freely anyway. These efforts resulted in the accumulation of cash, which could then be invested in initiatives and items of value.

Treasury stock buyback programs may sometimes result in value destruction. This may occur if a company overpays for its shares or issues shares to pay for acquisitions when those shares are undervalued. Additionally, this may occur if the company overpays for its shares. Even though it was not entirely connected to treasury stock, one of the most famous examples of poor timing to come out of corporate America in recent years was a deal that took place in 2010 in which the company formerly known as Kraft Foods, which had been spun off from Philip Morris, purchased Cadbury PLC. To pay for its overpriced $19.6 billion purchase, Kraft had to sell stock at a lower price than it was worth.

Examples

Exxon Mobil Corporation, one of the few big oil businesses and the principal progeny of John D. Rockefeller's Standard Oil empire, is one of the best instances of treasury stock you'll ever see on a balance sheet. It's also one of the largest examples you'll ever see. Exxon ended 2018 with a staggering amount of treasury stock on its books, totaling $225.553 billion, which it had purchased back but had not yet canceled.

Exxon Mobil adheres to a strategy that involves returning excess cash flow to shareholders through a combination of dividends and share buybacks. The company keeps the stock to use it again in the future. It typically acquires a significant energy company once every two decades. Exxon will use stock as payment for the acquisition. Reselling those shares lowers the proportion of ownership that the shareholders have in stock. However, it uses the cash flow to purchase those shares back, effectively eliminating the dilution.

Everyone involved came out ahead in the end. Those who wish to maintain their investment status and avoid paying capital gains tax due to the merger are the target audience for the purchase owners. In the end, the owners of Exxon Mobil are given the financial equivalent of an all-cash agreement, and their share is returned to its previous level. Rebuilding Exxon's treasury stock position requires the company to use the cash flow generated from its existing and newly acquired profit sources.

The Prospects for Treasury Stock in the Future

Some discussions take place in the finance industry from time to time on whether or not it would be a good idea to amend the rules regarding how businesses are required to keep treasury stock on balance sheets. At this time, the value of treasury stock is represented by its historical cost.

Some people believe it ought to represent the current value the firm's shares are fetching on the market. At the very least, in principle, the company can sell the shares on the open market for that price or use them to acquire other companies, transforming them back into cash or other valuable assets. This way of thinking has not yet become the norm.

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