How dual shares can put profits on the table
Voting and non-voting shares may give extra power to big investors, says this Canadian analyst, but it can benefit the average investor, too.
A funny thing happened in Bilbao, Spain.
After visiting the Guggenheim Museum (designed by the Canadian-born architect, Mr. Frank Geary), an investment executive and his wife went to lunch. He ordered a hot dish. She ordered a cold sandwich.
The waiters did an astonishing thing. After arguing with each other, they spread a tablecloth over the half of the table that would get the hot dish — and left the other half bare.
Apparently, sandwich eaters do not merit deluxe treatment. In fact, neither meal was particularly memorable, relates the executive in question, Mr. John Sartz.
But this curious incident did make him think of certain stocks that treat shareholders as two different classes of people.
Stocks with dual shares are the “moral equivalent of tablecloths,” Mr. Sartz writes in Investor's Digest of Canada. They cater to different types of purchasers, giving one group more consideration and influence than the other.
Yet this apparently discriminatory practice can work to the advantage of alert investors.
The skins in the game
Dual shares can split in two different ways. In some companies, there are multiple voting shares on one side and subordinated voting shares on the other.
In others, it’s a simple split between voting shares and non-voting shares.
In either case, the first group calls the shots. As Mr. Sartz puts it, the structure allows “a small proportion of shareholders to control the operations of a company.”
And the results aren’t always pretty for the rest of the shareholders. “Many of them have a well deserved reputation for acting in the interest of the controlling shareholders, while pretty much ignoring the wishes of those holders who actually have most of the skins in the game.”
This does not always go down well with the analyst’s colleagues. Some refuse to invest in companies with this structure, he says.
Without tablecloths
Mr. Sartz makes no such fine distinction. Over the past 30 years he has invested in two companies that have separate voting shares — Power Corporation of Canada (TSX-POW) and pipeline service firm ShawCor Ltd. (TSX-SCL).
Never for a moment, he says, has he “worried that the interests of the controlling shareholders have taken precedent over those of us without tablecloths.” Both have been sound investments.
And in several other cases, Mr. Sartz has “found additional opportunity to make some money in shares of companies that sport a dual share structure.”
He starts at the fish counter.
The non-voting discount
High Liner Foods, the frozen seafood company, has a voting share (TSX-HLF) and a non-voting share (HLF.A).
And there’s a useful discount with the non-voting shares. Here’s how it works. The non-voting shares are trading at $6.50 while the voting shares are just about a dollar higher at $7.51.
“Other than the vote,” says Mr. Sartz, “the shares receive the same dividend and own an equal part of the business.”
Thus investors who purchase the non-voting shares would get a dividend yield of 4.3 per cent while the voting shares have a lesser yield of 3.6 per cent. So the non-voters are in effect silent partners who trade their voice for a higher yield.
This may end. Judging by management pronouncements, says the analyst, the company will in future eliminate the two-tier structure, thereby putting an end to the non-voting discount.
The real world
But there’s an even more fascinating case, Mr. Sartz tells us. It is women’s clothing chain Reitmans (Canada) Ltd. which has a notable gap between its two classes of shares.
Right now, the voting share (TSX-RET) trades at $15.42. The non-voting share (RET.A) is $16.63. “In a rational world,” the analyst states, a vote could not possibly have a negative value of $1.21.
“But we live in the real world, not the rational one,” he adds. “As such, the non-voting shares command a premium by virtue of being more liquid. Thus investors in a hurry to establish a position are prepared to pay a premium for non-voting shares which demonstrably have less intrinsic value than the voting shares.”
In the past, says the analyst, he has traded back and forth between the two classes of Reitmans shares, each time extracting a premium — in effect selling high and buying low within the same stock. And of course, the yield is higher with the lower-priced voting shares.
“Currently, Reitmans’ voting shares are clearly the investment of choice,” Mr. Sartz concludes in Investor's Digest of Canada. And it all results from the irrational rush to buy what is apparently the less valuable of the two classes of shares, the non-voting one.
Admittedly, the gap between Reitmans’ dual shares is not typical. But keep a sharp eye out, says this analyst. Alert investors will always find a way to get on the right side of the tablecloth.
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