Intermediate4 min readDividends and Corporate Actions · 7/9
Treasury Shares: Why Does a Company Buy Its Own Stock?
Sometimes you read a disclosure saying a company bought its own shares in the market. Those are treasury shares. The question is what that changes for you as a shareholder.
What you will learn
Understand what treasury shares are.
Know the reasons companies give for buying.
Work out how a buyback affects earnings per share.
The lesson as a short video · 20 seconds · Watch on YouTubeIn this lesson
Treasury shares are a company's own shares that it buys in the market and holds. Cash leaves the company for the shareholders who sold, and the shares stay with the company and later resells or cancels them. The company announces these purchases and sales in disclosures that give the quantity and the session date.
Holding treasury shares in Egypt is subject to regulatory periods, limits and conditions; it is not open-ended. The listing rules say the holding period may be no less than 3 months and no more than one calendar year, otherwise the company must reduce its capital by their par value. Treasury shares may not exceed 10% of the company's listed shares, the purchase must be funded from the company's own resources rather than borrowing, it may not push the free float below the minimum, and the company discloses what it bought or sold each trading day.
Why would a company do it?
It sees the price below valueManagement may believe the market price is below what the company is worth. That is management's view, not a guaranteed fact.
Spare cashIf it has spare cash and no better use for it, it can return it to shareholders this way instead of through dividends.
Fewer sharesThe shares it buys are not counted as outstanding while held in treasury, so profits are divided among fewer shares.
How a buyback affects EPS
Before the buyback
Net profit (million)50
Shares (million)100
EPS0.50
After buying 5 million as treasury
Net profit (million)50
Shares outstanding (million)95
EPS0.526
The same profit over fewer shares, so each share's slice of profit grew.
ExampleAn invented company, Eastern Chemicals, earns EGP 50 million on 100 million shares: EPS of 0.50. It buys 5 million shares at EGP 8 and holds them as treasury shares, paying EGP 40 million. Those shares are not counted as outstanding while the company holds them. Assuming for simplicity they were treasury shares for the whole period and profit stays at 50 million, EPS becomes 50 ÷ 95 = 0.526, up about 5%. If the purchase happened mid-year, we use the weighted average number of shares outstanding. If the company later cancels the shares, that reduces issued shares and capital under the procedures, but it is not when the EPS effect begins, since the shares were already excluded. Either way, the company paid out 40 million of its cash.
So buying back has a cost: cash that could have gone to expansion, paying down debt or dividends. And the rise in EPS here came from fewer shares, not from the company earning more. The market may value that at a higher price, or it may not.
Watch outA company buying its own shares does not guarantee the price will rise. And if it later resells the treasury shares, the number of shares available in the market goes back up.
Find a treasury share disclosure
Open the disclosures page, look for a treasury share purchase or sale, and check the quantity against the company's total share count.
1. A company earns 20 million on 40 million shares and holds 8 million bought-back shares in treasury for the whole period. What is EPS if profit is unchanged?
Treasury shares are not outstanding: 20 ÷ 32 = 0.625, against 0.50 before the buyback.
2. EPS rose after the buyback. Does that mean the company earned more?
Profit is the same; it is just divided among fewer shares.
Summary
Treasury shares are a company's own shares that it bought in the market and holds.
Treasury shares leave the outstanding count from the purchase, so EPS rises because profit is split among fewer shares, not because profit grew.
Buying back costs the company cash and guarantees nothing about the price.