Disney's $95.6 Billion Arsenal

Source: Disney

As one of the largest companies in the world with a market cap of roughly $150 billion, The Walt Disney Company (DIS 0.18%) has a lot of resources at its disposal. But aside from the traditional tools at its disposal, like its $6 billion in commercial paper that management can tap into at any time or the $4.1 billion in cash that was on its books during its most recent quarter, the company has another, even bigger, resource at its disposal -- treasury stock.

The nature of treasury stock
When a company's management team has spare cash on hand and believes that said company's shares are undervalued, it has a good way to maximize shareholder returns through buying back stock. In most instances, the company retires the shares it buys by reducing its common stock outstanding, additional-paid-in-capital, and retained earnings but in the case in which management decides to keep its shares, the company enters them under "treasury stock".

While analyzing a company that possesses a great deal of treasury stock on its books, the Foolish investor needs to take some things into consideration. If a company buys back its shares and retires them, its ability to reissue additional shares is subject to its current authorization and, if it needs to make more shares public, it needs a registration or shelf registration document that authorizes the issue of more shares.

Source: Disney

In contrast, a company can sell treasury shares back to the public, use them for employee compensation, and/or deploy them in order to make major investments in other companies. Unlike shares that have been retired, treasury shares allow the company to essentially invest in itself.

This is because if the value of the company's common stock rises significantly over time, then the value of treasury shares upon their sale could be far higher than their initial purchase value. On the other hand, a big drop in share price could erode the value of the company's treasury shares, which would have the same impact on the corporation as it would on an individual investor.

Disney's war chest has become enormous
Over the past several years, Disney has become a major advocate of buying back its stock and retaining it as treasury shares. In fact, as of the end of the company's most recent quarter, management had accumulated 1.1 billion shares of Disney stock under this classification.

At cost, Disney records its treasury stock on its books at $37.8 billion. This represents a 67% increase in value since the end of 2009 when the book value of its treasury stock was $22.7 billion. For the sake of adhering to Generally Accepted Accounting Principles, or GAAP, the business does not see any impact on how it accounts for these shares when its own stock price rises or falls but, instead, can only see their value change when it sells or purchases shares. This flaw in accounting practices has resulted in a significant disparity for the entertainment giant.

Source: Disney

The most recent closing price of Disney's shares of $86.89 on July 11 values the 1.1 billion shares the company has on its books at $95.6 billion. This is far higher than what the company paid to purchase them over an extended period of time and testifies to management's ability to generate shareholder value.

It's currently unclear what Disney will eventually do with these shares, but if management concludes that its stock is becoming overvalued, or if an attractive opportunity comes its way, the company would have a great source of interest-free capital to tap into.

Foolish takeaway
Moving forward, it will be interesting to see what Disney does with its treasury stock. For as long as management believes the business will do well, the company will likely add shares to its arsenal. But in the event that Disney's executives think its shares are overvalued, or if an opportunity arises that would be worth an exchange of treasury shares, then management may utilize this valuable resource.

If management handles it appropriately, the potential for value generation through the use of Disney's treasury stock could mean enormous upside for the Foolish investor. However, if management buys back shares at a high premium to their intrinsic value, then it may be flushing money down the drain.