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What Are the Benefits of Holding Treasury Stock?

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  • Written By: Terry Masters
  • Edited By: A. Joseph
  • Last Modified Date: 19 August 2016
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The benefits of a corporation increasing its holdings of treasury stock include the ability to positively affect the per share price of the remaining stock on the market, to use the stock to provide incentives to employees in lieu of cash, to protect the company against hostile takeover attempts and to return capital to shareholders in a way that has a more positive tax result. Every corporation authorizes a total number of shares that can be issued to raise money. Authorized stock that is pulled off the market reduces the amount of the corporation's outstanding equity, allowing the corporation some control over supply versus demand. The supply of stock that is held in abeyance in the corporate treasury is a tool that executives can use for a number of targeted activities that require control over a valuable asset without having to authorize additional shares that dilute existing equity.

Corporations typically obtain treasury stock through a buyback of outstanding shares from current stockholders. Buybacks can have a beneficial effect on the market price of the corporation's stock because they decrease the amount of equity on the market. A smaller number of outstanding shares means that the earnings per share will seem to increase when investors run the numbers. Corporations that have excess cash can use this sort of manipulation to improve the company's overall financial outlook.

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Treasury stock can also benefit a corporation by providing an incentive for use in employee stock option plans. Corporate stock has a higher upside potential than a cash bonus or a bump in salary because stock can appreciate significantly over time. Availability of this sort of plan can be a significant enticement to recruit talented employees. The unused equity sitting in the corporation's treasury can fund a stock option plan without the corporation having to authorize additional shares.

Stock that is sitting in the treasury is unavailable for purchase in the event of a hostile takeover attempt. This equity can be reissued at any time, changing the ownership percentage that is required to control a vote to replace the board or management. Treasury stock also provides management with additional equity that can be used in the event of a merger. This stock is an asset that is banked for future use, benefiting the corporation by increasing its ability to control its financial position.

One of the most basic beneficial uses of treasury stock is to return capital to shareholders in a way that minimizes their tax obligations. Distributions of earnings to shareholders typically takes the form of a dividend that is taxed at the corporate level when it is distributed and at the individual level when it is received. A stock buyback is not a taxable event, however. The money used to buy back the stock is not taxed, and the shareholder is taxed only on money received after the stock is sold and capital gains can be determined.

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