Have you ever heard someone say that a particular company is about to repurchase its treasury stock, prompting friends around you to shout: “Hurry and join the buyers! The stock is about to soar, and if you don’t get in now, when will you?” Have you ever wondered why they say that? What exactly is treasury stock, and how is it different from outstanding shares? Why would a company buy back its stock?
Don’t worry; this article will reveal everything step by step. Today, let TEJ guide you through understanding what treasury stock is from the beginning!
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Before introducing treasury stock, let me introduce you to a company in Taiwan that is applying for a listing. The company’s paid-in capital must reach NT$600 million or more, and the number of common shares to be issued must reach 30 million or more. After listing or listing on the Taiwan Stock Exchange, these shares will be circulated to the secondary market, where we usually place our orders and become the so-called ‘Outstanding Stocks’!
What are treasury stocks? Simply put, treasury stock is when a company uses cash to buy back its shares! Imagine a company is like a shopkeeper who likes his products, and when he sees that they are selling well, he chooses to repurchase some of them. There are many reasons for doing this, such as to increase earnings per share, to increase shareholder value, or because the company thinks its stock is undervalued and wants to buy it at a lower price.
When a company announces that it will take money to buy back its shares, and the repurchased shares are not canceled, they are called treasury shares. A company that announces a treasury stock program usually sets a purchase limit, but how much is repurchased? That’s where the execution rate comes in! The execution rate is the number of shares bought back as a percentage of the total number of shares in the plan. If the execution rate is high, the company is actively buying back shares; if it is low, it may have reservations about the market.
To serve as a source of conversion for preferred shares or corporate bonds.
When a company buys back its shares, they are recorded in its account and can be converted to preferred shares or bonds at any time. Why is this so? Preferred shares and corporate bonds usually have unique conversion options that allow the holder to convert these financial instruments into common stock, also known as convertible corporate bonds.
Companies can use treasury shares to adjust their capital structure, ensuring market liquidity and boosting investor confidence. This makes treasury shares a powerful tool for navigating market volatility and responding to various situations.
The company can buy back treasury shares as part of the employee incentives, such as stock options or employee bonuses, which not only allows employees to feel that the company values their efforts but also has more confidence in the future of the company, more committed to work, and grow together with the company because they know that they have the opportunity to share the fruits of the company’s growth, and also can effectively solve the ‘agent problem’ between the company and the employees. The agency problem between the company and its employees can be solved simultaneously.
Lastly, treasury stock can be necessary for safeguarding a company’s autonomy! When there is a potential risk of a hostile takeover in the market, a company can opt to repurchase its shares, thereby reducing the number of outstanding shares and increasing the shareholding proportion of internal shareholders, thus strengthening management’s control. This prevents external investors from using considerable shareholdings to initiate takeovers or alter the company’s management.
In such situations, treasury stock acts as a “shield” against external threats, protecting the company from hostile takeover attempts. It also allows the management to focus more resources on the company’s long-term growth and value creation.
Is a company’s buyback of treasury stock excellent or bad? After the buyback, investors need to consider the following factors carefully:
When a company decides to repurchase treasury stock, it often requires a significant cash outlay. This expenditure can impact the company’s liquidity, particularly in the short term, as cash flow may become tighter. If the buyback is substantial, the company might need to readjust its capital allocation, possibly even reducing other operational or investment projects to support the buyback plan.
Moreover, if the market environment is unstable or the company needs funds for its operations, holding a large amount of treasury stock could add financial pressure. Therefore, companies usually conduct a careful cash flow assessment before deciding on a buyback to ensure that core operations won’t be affected and that unexpected funding needs can be met.
When a company announces a treasury stock buyback plan, the market often views it as positive news, interpreting it as a sign that the stock is undervalued. This perception may lead to a short-term increase in stock price. However, this rise, driven by the buyback, is usually short-lived and may not be sustainable in the long run. The stock may eventually decline if the company’s operational performance doesn’t improve or earnings cannot support the increased stock price.
Investors should be cautious in this situation. While a buyback may temporarily boost the stock price, only improvements in financial performance and business fundamentals can genuinely support sustained stock growth. Otherwise, once market enthusiasm fades, the stock price could return to levels that reflect the company’s actual performance—or even drop below the pre-buyback level—rendering the short-term “buyback effect” a fleeting phenomenon.
After mentioning so many functions that treasury shares can play, do you know what companies need to pay attention to when buying treasury shares? Below is a list of frequently asked questions about treasury stocks!
First, listed companies must report and announce the information of share repurchase to the FSC by the ‘Regulations on Share Repurchase by Listed Companies‘ and input it into the Market Observation Post System (MOPS). The content of the announcement must include the purpose of the repurchase, the type of shares, the maximum total amount of shares to be repurchased, the scheduled period and amount of shares to be repurchased, the range of prices for the repurchase, and the method of the repurchase, etc. Among this information, the cost of the repurchase should be determined by the FSC.
Among them, setting the buyback price is a critical concern for the market! There are many factors that a company needs to consider when setting the buyback range price, such as the current share price, the average and volatility of the recent share price, the Company’s reason for buying back the shares, and the timing of the planned buyback, etc. These considerations can help the Company avoid setting a high buyback price for the market. These considerations can help the Company avoid setting a price range that is too unreasonable and misleading to investors.
According to the FSC’s recommendation, after considering the above factors, it is appropriate to set the buyback range between 150% of the average closing price the ten business days or 30 business days before the board of directors’ resolution, whichever is higher, and 70% of the closing price of the date of the board of directors’ resolution. If the Company finds that the share price exceeds the set range when buying back shares, whether above or below the range, the Company must stop buying back. However, the Company can reassess the situation, revise the range, announce, and continue to buy back. An exception is made if the board of directors has already resolved to ‘continue to buy back even if the share price is below the lower limit of the range!
Yes, we do! When the number of shares repurchased reaches 2% of the total number of issued shares or the amount reaches NT$300 million, the company must immediately make an announcement! When the number of shares repurchased reaches 2% of the total number of issued shares or the amount reaches NT$300 million, the company must immediately make an announcement! Therefore, during the buyback period, the company has to keep reporting the progress to the outside world so that everyone can keep up with the latest developments of the treasury shares! In addition, if the buyback is not completed during the execution period, according to Article 5 of the ‘Regulations on the Buyback of the Company’s Shares by Listed and OTC Companies’, the buyback must be conducted again by the board of directors’ resolution, and therefore, the company still needs to make announcements and reports by the regulations.
According to Article 28-2 of the Securities and Exchange Act, when a company repurchases treasury shares, it must transfer them to its employees within five years of repurchasing. If the shares are not transferred within five years, they are considered unissued and subject to change registration.
How can an investor find out if a company has treasury shares? There are two main channels for the relevant information.
The most common way is to go to the Market Observation Post System (MOPS) and look for it directly! Click on ‘Information for Treasury Stocks’ under ‘Investment Section’ → ‘Company Stock Buyback Data For Listed Company’ on the MOPS, and you can see the basic information about treasury stocks such as the purpose, type, total amount limit, scheduled buyback period and quantity, etc. as mentioned in the previous section!
Treasury Stocks Enquiry Pipeline 2: TEJ PRO
If you want to use treasury stocks to analyze the company’s share price in more detail, you can check TEJ PRO! Log in to TEJ PRO and click ‘Treasury Stock Information’ in the database of listed and former listed companies; you can quickly get all the relevant and more detailed information. In addition to the basic information provided in the Market Observation Post System (MOP), TEJ also provides the start and end date of the actual buyback, the number of shares held at the time of the resolution (%), and the amount of the application as a percentage of the current assets (%), etc., which allows you to feel at ease and use TEJ’s data to conduct quantitative analysis. You can use TEJ’s data to conduct quantitative analyses with peace of mind and make your experimental results more accurate!
TEJ’s data is updated every day before 10:00 pm, and it also provides a period condition query function, which makes it more convenient for you to filter the trading information you need!
Through the introduction of this article, you should understand that treasury stock is not only an investment strategy for companies but also a versatile tool to respond flexibly to market changes, enhance company value, and motivate employees. However, treasury shares also have risks, especially regarding liquidity and short-term stock price fluctuations. Therefore, when investors see a company announcing a treasury stock program, they should consider the company’s motivation and the market situation rather than unthinkingly following the trend.
