Share buyback

Q & ACategory: QuestionsShare buyback
EL asked 4 years ago

Hi all,
While assessing share buyback by management, I noticed that there’s 2 types; buyback for cancellation and buyback to retain in treasury. I’ve only heard from the video that it’s good if the share is bought back by the company as it will be cancelled, thus our portion will be bigger. But what about the buyback for the purpose of retaining it in treasury? Is that a good thing too? 

2 Answers
NICHOLAS OH answered 4 years ago

Bought back shares are always held in treasury and taken out of circulation. Number of shares outstanding will be reduced. There are 2 options after the shares are converted to treasury shares.
1. Shares can be cancelled. This means the shares are written off completely
2. Treasury stock can be reissued again and released back into circulation.

NICHOLAS OH replied 4 years ago

Once bought back, number of shares will immediately be deducted from outstanding shares even if not cancelled.

A good manager will know when to buy back his own stock and when to issue it back again. When shares are trading below intrinsic value, it makes sense to buy back shares and when its overvalued issue shares.

EL replied 4 years ago

Thanks for your feedback, I searched Investopedia as well prior to asking in this forum and your answers seems to be easier for me to understand.

Can you also explain to me further if once this share is bought back by the company and goes into treasury, will this amount of share already be deducted from the outstanding shares? Or will the shares only be deducted from the outstanding shares once it is cancelled?

If the treasury stock are meant to be reissued again, why will a company buy it back?

Thanks again!

Peter Lim Staff answered 4 years ago

Cancelling treasury shares is like cancelling an OD facility.
Good: Shows that the company is strong that it won’t issue more shares.

Bad: It gives less option to the management.

The management can buyback shares when the stock price is undervalued, and then sell to the market when the stock price is overvalued, thus making a gain. This gain however, is not reflected in the income statement.