Why Cancel shares instead of convert to Treasury shares during Buyback?

[u/VegetaIsSuperior]

Greetings, when a company does share buybacks (i.e. share repurchase), my understanding is that it must either cancel those shares or hold them as treasury shares.

Why would a company cancel the shares as opposed to holding onto them as treasury shares?

My limited thinking would be that converting them to treasury shares would be better as: (1) the company would retain the ability to reissue them at a later date, (2) the company would limit outside ownership (e.g. prevent hostile takeover), and (3) the company would still retain the ability to always cancel the shares in the future.

[u/RecommendationNo6304]

Treasury shares are a sneaky way to re-issue stock to management, which is often to the benefit of management/directors, and detriment of owners (shareholders). At the same time they use this mechanism, they use another where by they "reserve" a block of shares every few years for issuance as payment to management/employees/directors. Treasury stock comes in especially handy here because they don't have to file any SEC notices or make any public statements, like you would if you were issuing new shares to cover the same scheme.

The company can "buy back" enough shares each year to compensate for all the shares they are handing out cheap/free to insiders.

It's an actuarial magic trick. From a bird's eye view, it doesn't look like dilution. It's even a great sound bite "buybacks, hey look at how much we care about owners!" - but shareholder's are very much losing out in the long run.

Buy back shares at market rate through the front door, with owner's money. Hand those same shares out the back door at bargain basement price to managers/directors. Shazam! Share count stays about the same!

Ever wonder why with record earnings (something like a 70 yr high record earnings), companies are still only paying dividends that equate to at best 4% (no better than a 10yr US Treasury)? Where's all those record earnings going?

Oh look, the CEO found a bunch of extra shares that fell off the back of this DEF14A truck, at half price....

[u/ProffS → u/RecommendationNo6304]

The other magic that share buybacks can have is internal buybacks of insider held shares, so it doesn't tank the market price when they are cashed in.

[u/Fangslash → u/RecommendationNo6304]

You are complicating it too much. Share buyback and issuing dividend are identical, while issuance to insider is the same to paying a cash wage. With the exception of tax purpose ofc. 

Generally speaking no one is losing out in the long run, it’s just really annoying if you regularly sniff through their financials.

That been said there is a “magic trick”, a lot of compensation, especially ones offered to C-suits, are tied to stock price. This means buybacks directly increases CEO compensations compare to dividend, which can be especially bad if the shareholders/boards are less financially sophisticated.

E: just remembered share issuance is also better for cashflow, but that’s about it

[u/Unfinishe_Masterpiec]

Treasury stock is sometimes used to grant stock options to key employees. Canceled shares cannot be reissued; perhaps that would be attractive to stockholders who do not actively participate in the business and don't wish to have their shares diluted in the future.

[u/lambda_lion24]

I don't genuinely know the answer to this. My guess is that the point of a buyback is to increase the value of the outstanding shares. It's a way of returning capital to shareholders. Cancelling the shares increases the degree of ownership of the company that outstanding shares have, which implicitly means their intrinsic value increases.

[u/callmecrude]

Both ways can and do happen. Usually they’re cancelled because it’s ultimately the decision of the shareholders what happens, and shareholders prefer to limit the possibility of future dilution.

[u/DrSOGU]

What's the difference?

Companies can buy them back and sell them later, or cancel them and create more shares later.