Treasury Stock

Treasury stock is common stock purchased by the company and held indefinitely. It is a tool used to consolidate the number of unique investors or number of shares outstanding.

Union Pacific Loses $20 Billion of Intrinsic Value in 2021

Union Pacific

In 2021, Union Pacific had sales of $21.8 Billion, the 2nd highest ever recorded. Union Pacific generated a pretax profit of $8.5 Billion, the highest in its entire history. In effect, 2021 was one of the best if not the best financial year in the history of Union Pacific. But yet, Union Pacific’s intrinsic value dropped $20 Billion during the same time period. How can this have happened?

Value investors focus on intrinsic value and the market’s valuation points. However, the Board of Directors are focused on returning value to the shareholders. Bascially, the Board authorized a stock buy-back at a price dramatically higher than the stock’s intrinsic value. The difference is equivalent to transferring intrinsic value to a few lucky shareholders at the expense of remaining shareholders. This business concept of treasury stock (buying back stock) is only effective IF the stock is purchased at or less than the stock’s intrinsic value.

Treasury Stock – Fundamentals of Stock

Treasury Stock

Those corporations doing well and flush with cash sometimes buy back stock from their investors. Once purchased back by the company the stock is called treasury stock. However, in small business, buying back stock can significantly alter the entire corporate control ownership and impact the long term outcome and direction of the company.

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