Introduction
By the end of 2025, McDonald's had issued 1.66 billion shares over its history and had 711 million outstanding. The other 950 million it had bought back and held in treasury, carried on its balance sheet at their cost of $79.3 billion. That figure is larger than the $70.3 billion of retained earnings the company had accumulated from decades of profits, and the result was total shareholders' equity of minus $1.8 billion. McDonald's is consistently profitable; its negative equity is the accounting record of having returned more cash to shareholders, through buybacks and dividends, than it has kept.
How a buyback moves cash and equity through the three statements, including the 1% excise tax and accelerated repurchases, is traced in issuing and buying back stock. Inside equity, what matters is whether the repurchased shares are held or retired, what happens when they are reissued, and how bankers should read the totals that result.
Treasury Stock or Retirement
A company that buys back its own shares can hold them as treasury stock or retire them. Most large US companies that hold them use the cost method: the shares are recorded at the price paid, as a single negative line in shareholders' equity, and the other equity accounts are untouched.
A share retirement instead removes the shares from issued capital: their par value comes off common stock, and Accounting Standards Codification (ASC) 505-30 lets the company split the amount paid above par between additional paid-in capital, up to the paid-in capital those shares carried, and retained earnings, or charge it entirely to retained earnings, as Deloitte's guide to repurchases, reissuances and retirements explains. A third option, charging the whole excess to paid-in capital as long as that balance does not turn negative, is written into the Codification by Accounting Standards Update 2025-12, effective for annual periods beginning after December 15, 2026.
- Treasury stock
Shares a company has issued and later reacquired but not retired. Under the cost method, they are carried at the price paid as a deduction from shareholders' equity, have no voting or dividend rights, and are excluded from shares outstanding for earnings per share.
Suppose a company has $500 of common stock and paid-in capital from issuing 100 shares at an average of $5, and $1,000 of retained earnings. It buys back 10 shares for $30 each:
| Line item | Before | Held in treasury | Retired |
|---|---|---|---|
| Common stock and additional paid-in capital | 500 | 500 | 450 |
| Retained earnings | 1,000 | 1,000 | 750 |
| Treasury stock, at cost | 0 | (300) | 0 |
| Total shareholders' equity | 1,500 | 1,200 | 1,200 |
| Shares outstanding | 100 | 90 | 90 |
On retirement, the shares' original paid-in capital of 5 each is removed, and the 25 per share paid above it is charged to retained earnings.
Total equity and shares outstanding are identical either way; only the presentation differs. Apple, for example, holds no treasury stock: the shares it repurchases cease to be issued, and its fiscal 2025 annual report charges their full cost to its accumulated deficit (retained earnings below zero), leaving paid-in capital untouched. McDonald's holds its repurchased shares, so they accumulate in a single treasury line. Comparing equity components across the two requires putting them on the same basis, which is where the statement of shareholders' equity helps.
Reissuing Treasury Shares
Treasury shares can be reissued, most often to satisfy employee stock awards and option exercises. Because a company cannot earn income by trading its own shares, any difference between the reissue price and the shares' cost stays in equity. A reissue above cost adds the excess to additional paid-in capital. A reissue below cost is charged first against paid-in capital from earlier treasury stock transactions and then against retained earnings. Reissuing the 10 shares above for $40 each would bring in $400 of cash, remove $300 of treasury stock and add $100 to paid-in capital, with no effect on net income.
When Buybacks Push Equity Below Zero
Negative equity from buybacks is not rare among mature, cash-generative companies. McDonald's repurchased $2.0 billion of shares and paid $5.1 billion of dividends in 2025, returning about $7.1 billion to shareholders against net income of $8.6 billion. Year after year of distributions near or above earnings, funded partly by debt, has left its treasury stock larger than the retained earnings it would otherwise offset, as its 2025 annual report shows.
The broader gap between book value and what a business is worth is covered in book value vs market value. For bankers, the more useful question is what the buybacks were funded with. Repurchases funded by free cash flow simply return surplus capital; repurchases funded by new borrowing raise leverage, and a credit analyst will treat them that way.
Buybacks in Bankers' Analysis
Once the accounting is settled, bankers judge a buyback on three things: what it does to EPS, how it compares with a dividend, and how much of it is really returning capital.
Accretion and the Cost of Funds
A buyback raises earnings per share (EPS) if the earnings given up by spending the cash, or the interest on the debt raised, are smaller than the earnings attributable to the shares retired. A quick test compares the company's earnings yield, the inverse of its price-to-earnings multiple, with the after-tax cost of the funds used.
EPS accretion is not the same as value creation: a buyback adds value only if the shares are bought for less than they are worth. The weighted-average share mechanics behind the EPS effect are covered in earnings per share: basic vs diluted.
Buybacks Versus Dividends
Buybacks and dividends both return cash, but they differ in ways that matter for analysis. Dividends are paid to every shareholder and are hard to cut without sending a negative signal; buybacks can be scaled up or down each quarter, which gives them flexibility dividends lack. For shareholders, a buyback returns cash only to those who sell, and they owe tax only on their capital gain, the excess over what they paid, while every holder owes tax on the full dividend. For the company, buybacks reduce the share count and so raise per-share measures, while dividends leave the count unchanged. Since 2023, buybacks by publicly traded US corporations have also carried a 1% excise tax, which dividends do not, levied under Internal Revenue Code Section 4501 on repurchases net of shares issued in the same year.
Gross and Net Buybacks
Many companies buy back shares partly to offset dilution from employee stock awards. A company that repurchases $5 billion of shares while issuing $3 billion of shares to employees has reduced its share count only by the net buyback, about $2 billion worth of shares. Comparing the reduction in diluted shares outstanding with the cash spent on buybacks shows how much of the program is returning capital and how much is absorbing stock compensation, covered in stock-based compensation on the three statements.
How Buybacks Are Executed
Most buybacks are executed in one of a few ways:
- Open-market purchases: bought through a broker over time, often under a preset trading plan that allows purchases to continue during blackout periods.
- Accelerated share repurchases: a lump sum paid to a bank for immediate delivery of most of the shares.
- Tender offers: an offer to all holders at a fixed price or through a price range, used for large, fast repurchases.
Open-market programs usually operate within the Rule 10b-18 safe harbor of the Securities and Exchange Commission (SEC), which protects issuers from manipulation claims if they use one broker a day, avoid the opening trade and the end of the session, pay no more than the higher of the highest independent bid and the last independent trade price, and buy no more than 25% of average daily trading volume, as the SEC's Rule 10b-18 guidance describes. The accounting is the same in every case: the shares go to treasury or are retired at their cost, and nothing reaches the income statement.
