When it comes to dual-class shares, voting shares have certain advantages over non-voting shares
Aside from specific investments (such as U.S. and Canadian stocks, income trusts or exchange-traded funds), our Inner Circle members ask us a wide range of investment questions. For example, I’ve been asked in the past about Canadian Tire Corp (Toronto symbol CTC.A and CTC), noting that the company has dual-class shares, or two share classes. The subscriber asked which share was better to buy.
At the time, I explained that Canadian Tire Corp has two classes of shares: the common shares (symbol CTC) carry one vote per share and the class A shares (symbol CTC.A) are non-voting. Investors can buy either class of share. At the time, I also told him which share was better to buy, and that we cover Canadian Tire in our Successful Investor newsletter. In addition, I felt like this question was a good opportunity to talk more about dual-class shares.
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Most Canadian stocks with dual-class shares, including Canadian Tire, have a “coattail provision” in place. This provision aims to ensure that even with dual-class shares, both share classes have equal rights in the event of a takeover. So, if you hold non-voting or subordinate-voting shares, you won’t miss out on a takeover bid. For example, Canadian Tire’s non-voting class A shares would carry one vote per share in the event of a takeover offer, just like the common shares.
Dual-class shares of Canadian stocks: Discover why voting shares have certain advantages for investors over non-voting shares
In the situation of dual-class shares, if a company’s two classes trade for roughly the same price, you’re better off buying the voting shares. That’s because the voting shares may move substantially higher than the non-voting shares if a shareholder who is trying to take control of the company accumulates a large number of shares. In addition, for companies with dual class shares, their voting shares sometimes trade above their non-voting shares because certain institutions refuse to buy non-voters, or only buy them in limited quantities.
Canadian stocks sometimes combine their voting and non-voting dual-class shares into a single share class to make themselves more attractive to investors (particularly institutional investors) who dislike non-voters. When that happens, the voting shares may get a 10% to 20% premium over the non-voting shares in return for sharing control of the company. So, if you can buy the voting shares of a dual-share company for less than, say, a 5% to 10% premium over the non-voting shares, it can be a worthwhile investment.
Note that most Canadian stocks with dual-class shares have far fewer voting shares outstanding, and they trade far less actively than the non-voters. However, for long-term investing, having a vote is more valuable than benefiting from a high level of liquidity, since the voting shares will tend to trade at or above the non-voters.
That’s why we recommend you buy the voting shares when they trade at roughly the same price or less than the non-voters. Download this free report to find even more investing tips.
Learn how investor fears about Canadian stocks with dual-class shares can lead to bargains
Some investors feel that dual or multiple share classes concentrate too much power in the hands of insiders and consequently expose outsiders to added risk. Some companies with multiple share classes do abuse outside investors. So do all too many companies with a single class of shares.
Over the years, we’ve had great success with a number of companies that have two or more share classes. Often, you can invest in these companies at a lower ratio of price to asset value or earnings power simply because some investors prefer not to invest in them.
We, of course, only recommend stocks if we see the insiders as people of high integrity. In that case, there is little extra risk in investing in a company with multiple share classes. On the other hand, if the insiders are inclined to cheat you, they will find a way to do so, regardless of the company’s share structure.
There are many opinions on the nature of investing. Some claim that it can be reduced to a science. Yet that ignores the fact that emotions play a large part in investing. Beginning investors can be gripped with fear and act in haste when the market is plunging, and their stocks with it. Or they may acquire the gambler’s mindset that a quick run of luck with one stock can easily be repeated. Even experienced investors can fall into these traps.
The best way to approach investing is to build your investment portfolio gradually, but systematically, with a firm goal in mind. Be patient, be informed about the investments you are considering and keep everything in perspective. Take a conservative approach to risk and an optimistic approach to high quality stocks. That way you won’t be pushed off course by turbulent markets. Keep in mind that stock prices generally reach successively higher levels over time.
If you have investment-related questions, or if you’d like to ask me about stocks you’re considering buying (or selling), you should join my Inner Circle service.
What are your thoughts on dual-class shares? Leave a comment below.
How do dual-class shares fit into your investment strategy? Is it something you pay attention to, or is it inconsequential in your decision-making process?
This article was originally published in 2016 and is regularly updated.
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