Treasury stock refers to shares that a company has repurchased from the open market and holds in its own treasury. These shares are not considered when calculating dividends, leading to several impacts on dividend payments.

Firstly, since treasury shares do not receive dividends, the total dividend payout of the company decreases. This reduction in total dividends can increase the dividend per share for remaining outstanding shares, assuming the company's total dividend payout remains unchanged. Essentially, the same amount of dividend is distributed among fewer shares, potentially providing higher returns to existing shareholders.

Secondly, the repurchase of shares reduces the number of shares outstanding, which can positively impact the company’s financial ratios. For example, metrics such as Earnings Per Share (EPS) and Return on Equity (ROE) may improve, which can attract investors and support a higher stock price.

Additionally, the decision to hold treasury stock might indicate that the company believes its shares are undervalued, signaling confidence in its future performance. This could lead to positive market sentiment, potentially driving up the stock price.

However, repurchasing shares and holding them as treasury stock reduces the company's cash reserves. If substantial amounts are spent on buybacks, it may limit the company’s ability to pay future dividends or invest in growth opportunities. Therefore, while treasury stock can enhance dividend payments for current shareholders, it must be managed carefully to balance immediate returns with long-term financial health.