Dual Class Shares Suck
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If you hold any companies that have a dual-class share structure, prepare yourself for mediocracy. In the Winter 2007 edition of the Canadian Investment Review, which is periodical aimed at fund managers and pension plan administrators, they highlight just how bad these stocks typically performs. Before I get into the specifics, let’s talk about what a dual-class share is.
Dual-class shares mean simply that a company has two versions of its stock available to the market. One is typically the shares that you and I can buy on the open market by placing a trade with our discount brokers. The other shares are more tightly held, such as by a controlling family or group of investors. Simply put, a small group of shareholder managers can control a disproportionate amount of votes relative to their equity investment. This suggests that there is weak alignment between what these owner-managers interests and those interests of outside shareholders. The risk is that these votes can be used to manipulate the actions of the company for the personal benefit of the controlling shareholders.
So how much more worse do dual-share companies perform? They sell at a discount of anywhere from 1.27 to 1.39 times book value when compared to companies in their peer group. In simple english, this means that these stocks do not reach the same values as their single-class counterparts and you may be losing out on money. From a statistical perspective, it would be better to hold the single-class stock in the industry you are looking at, compared to the dual-class company. Although I didn’t know this type of information at the time, it is a prime reason I have not invested in Canadian companies such as Magna and Bombardier. I want a company that will act for the greater shareholder, not for themselves.
P.S. I know that Berkshire Hathaway has a dual-class share structure – I believe that that company is not the norm when it comes to dual-class shares. Berkshire is the epitome of working for the shareholder and shareholder rights. It is not the same as Hollinger International (Conrad Black).
(Photo Credit: Andrzej Pobiedzinski)
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5 Comments on this post
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Rob Madrid said:
What about Shaw Communications? I believe they are a dual share ownership as well but if I’m correct they have a strong history of raising dividends.
April 1st, 2008 at 5:44 am -
ThickenMyWallet said:
Rob- There are always exceptions to the rule (Google being the most notable one aside from Berkshire Hathaway). Shaw has a dual share ownership but what happens after Shaw retires and control of the company is handed down?
April 1st, 2008 at 10:14 am -
David said:
what are some other high-profile companies who use this dual-class system? I know of News Corp, Dow Jones, Washington Post, and Comcast. Obviously all media corporations but any others you can think of?
April 20th, 2008 at 11:17 pm
[...] The Dividend Guy followed up with “Dual-class shares suck“: From a statistical perspective, it would be better to hold the single-class stock in the [...]
[...] the founding families or insiders. Dual class shares are generally panned by the blogsphere since dual class shares tend to perform worse than their peers, controlling shareholders tend to run roughshod over the minority shareholders and, as we are [...]