THE public should have sought a long time ago the implications of treasury shares on the financials of listed companies. They should have also asked why shares bought back by listed companies remain, for a certain period of time, an entry under stockholders’ equity when these should have been deemed “retired” from the time they have been reacquired from the public.
In practice, shares that are bought back and become treasury shares are not automatically treated as “retired.” The majority stockholders who control the board decide whether to retire them or reissue them. If they go for the latter, they wait for a good market when their company’s share price goes up to a certain level that would make the reissue more profitable.
If the public would look closely at the resale or reissue of treasury shares, they would find this unfair to them. They would be buying back at a premium what they had earlier sold back to the company at a much lower price.
Cheating the public
The public would certainly feel cheated by said corporate act which, of course, is tolerated by the Securities and Exchange Commission and the Philippine Stock Exchange because it is legal.
What happens when treasury shares are sold back to the public?
Definitely, the number of outstanding shares would go back to, say 2 million common shares, when it used to be 1.75 million common shares. This means a company’s policy of distributing 30 percent of the previous year’s net profit as dividend would have to benefit the owners or holders of 2 million common shares.
What if a company retires its treasury shares?
Using the same theoretical example, the company would have 1.75 million outstanding common shares. With fewer outstanding shares, a 30-percent allocation of the previous year’s net profit would be divided among the holders of 1.75 million common shares and not of 2 million common shares.
The treasury shares, meanwhile, would be cancelled by reducing the authorized capital stock (ACS) of said corporation by 25 million common shares.
If the company’s ACS consists of 3 million common shares, this would go down to 2.75 million, of which 1.75 million shares are outstanding. The capital reduction requires amending the governing provision of said company’s Articles of Incorporation.
This brief on treasury shares is presented here as a reminder for the public to review well the filings of listed companies that are engaged in buying their own shares in the open market. The individual investors who trade in listed stocks will never know what the majority stockholders are planning to do with the resulting treasury shares. Will they ask the board, which they control, for approval of either reissuing them or retiring them?
This month alone, filings posted on the website of the Philippine Stock Exchange showed at least three listed companies have been buying back their own shares. No one among the public would know why Vista Land and Lifescapes Inc., Del Monte Pacific Ltd. and International Container Terminal Services Inc. are engaged in share buybacks.
As of Sept. 10, the PSE website showed the accumulated repurchase by Vista Land of 113.7 million shares; Del Monte, 1.1 million shares; and ICTSI, 8.4 million shares.
What do the three public companies intend to do with so many treasury shares in their books? The public could only hope that Del Monte, Vista Land and ICTSI would retire their treasury shares. The smaller the number of outstanding shares, the bigger their share in either cash or stock dividends.
With their strong financials, there is no doubt these three companies can well afford to buy back their own shares. As of June 30, 2015, ICTSI had retained earnings of $784.7 million; Del Monte, $105.7 million as of April 30, 2015; and Vista Land, P28.3 billion as of June 30, 2015.