[Beginner's Guide] Treasury Stock Cancellation, Is It Good for Shareholders?

[Asia Economy Reporter Kwon Jaehee] As companies continue to announce their fourth-quarter earnings for last year, one common highlight stands out: 'treasury stock cancellation.'

Kakao announced on the 11th, along with its 2021 earnings report, that over the next three years, it will allocate 5% of its free cash flow based on separate financial statements to cash dividends, and 10-25% to treasury stock repurchases and cancellations.

Financial companies are doing the same. KB Financial Group, which recorded record-breaking earnings last year, announced plans to cancel treasury stock worth 150 billion KRW. Shinhan Financial Group and Hana Financial Group also hinted at treasury stock cancellations.

What exactly is treasury stock cancellation?

Treasury stock cancellation literally means burning and eliminating treasury stock. It involves a company using its cash to eliminate its own shares, reducing the total number of shares by the amount canceled. As the number of shares decreases, the value per share increases.

For example, consider a company with a market capitalization of 10 billion KRW and 1 million shares outstanding. If the company cancels 500,000 shares, the total value of 10 billion KRW remains unchanged. Therefore, with the shares reduced to 500,000 after cancellation, the value per share increases, resulting in a rise in stock price.

For this reason, treasury stock cancellation is regarded as a representative shareholder return policy.

What is the difference between dividends, treasury stock repurchases, and treasury stock cancellations?

Other frequently mentioned methods to enhance shareholder value include treasury stock repurchases and dividends.

While dividends return profits directly to shareholders in the form of cash or stock, treasury stock repurchases reduce the number of outstanding shares to increase the value per share, thereby encouraging stock price appreciation.

In terms of increasing value per share, treasury stock repurchases and cancellations may seem similar. However, treasury stock repurchases can later be reissued to the market, whereas treasury stock cancellations reduce the total number of issued shares, making cancellations a more powerful shareholder return policy than repurchases.

Additionally, treasury stock repurchases may not always be effective. Typically, repurchases have a clear impact during a rising market but are less effective in a declining market. Therefore, conducting both repurchases and cancellations together is necessary to expect a stock price increase effect.

Why implement shareholder return policies?

Recently, companies have been actively pursuing shareholder return policies, which reflects the changing significance of individual investors in the domestic stock market.

Traditionally, the domestic stock market experienced strong rallies followed by prolonged periods of stagnation known as 'Boxpi' (a combination of 'box range' and KOSPI). After the COVID-19 pandemic led to a market boom, the KOSPI reached an all-time high of 3,305.21 in July last year but has struggled this year. Especially with foreign investors engaging in sell-offs, the KOSPI slid down to the 2,600 level.

Given this situation, concerns about being trapped in Boxpi have grown among investors, leading more individual investors to turn their attention to overseas stocks.

The securities industry analyzes that companies are actively implementing shareholder return policies to retain these investors.

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