Which share class should you buy?



Question: I am still confused about GOOG and GOOGL. I know there is a difference, but what? In which to invest?

A: Your question is topical. Last week, the S&P Dow Jones indices announcement it would no longer add companies with multiple share class structures to its S&P Composite 1500 index and its component indices, the S&P 600, S&P 500 and S&P 400.

The existing constituents of the index are grandfathered and will not be affected by this change, meaning that existing companies with multiple share classes will be allowed to remain in the widely followed S&P 500, such as Alphabet Inc Sharing (GOOGLE) and C actions (GOOG); Discovery Communications Inc C actions (DISK) and apart (DISK); Corp News Sharing (NWSA) and B actions (NWS); Twenty-first Century Fox Inc Sharing (FOXA) and B actions (FOX); and Under Armor Inc Sharing (UAA) and C actions (UA).

However, companies with multiple share class structures will no longer be added to the indices. (This is bad news for people like Snap Inc (BREAK) and blue apron (APRN).)

Why do some companies have more than one class of shares?
The difference between share classes comes down to voting rights.

To find out the voting rights associated with a company’s share classes, an excellent resource is its annual report (filed with the Securities and Exchange Commission as 10-K). Let’s look at Google, which offers two classes of shares available for purchase: Class A common stock. (GOOGLE) and class C share capital (GOOG). According to Alphabet’s annual report, the A common share, GOOGL, has one vote per share, while the class C capital share, GOOG, does not have voting rights.

There is also a Class B common stock, but you are unlikely to see it in the market as it is almost entirely owned by Google’s ruling triumvirate: Executive Chairman Eric Schmidt; Sergey Brin, co-founder of Google and chairman of parent company Alphabet; and Larry Page, co-founder of Google and CEO of Alphabet. B shares aim to ensure that the founders of the company retain the majority voting rights; according to the most recent 10-K, as of December 31, 2016, Schmidt, Brin and Page held approximately 92.4% of our outstanding Class B common shares, which represented approximately 56.8% of the voting rights of the share capital in circulation. The annual report goes on to explain that these three officers therefore have “significant influence over management and affairs and on all matters requiring shareholder approval, including the election of directors and material business transactions, such as a merger or other sale of our company or our assets, in the foreseeable future.

At the time of sharing of shares on April 2, 2014, Google shareholders received one Class C share (in the form of a stock dividend) for each Class A share they held. Class C shares began trading on April 3 under the initial symbol GOOG, while class A shares began trading under the name GOOGL. The main objective of the stock dividend was to maintain the concentration of votes with class B shareholders. (In particular, employee stock options for non-voting shares (class C) are not dilutive for Page, Brin and Schmidt.)

– source: Morningstar Direct

Since the time of this stock split, the A shares with voting rights (shown above in blue) have traded at a slight premium over non-C shares (in green), indicating that the market allocates some value to voting rights, but not much. Equity analyst Ali Mogharabi points out that the movement of the two stocks is very strongly correlated.

“Since GOOG was introduced in April 2014, the correlation between GOOG movement and GOOGL has been 0.9988,” he said.

When it comes to what class of shares an investor should buy, voting rights are not as important a consideration as valuation, in my opinion. In other words, I would choose the share class that sells for a lower price than the estimate of fair value. If the valuations were equivalent, I would choose A shares because of their voting rights, but I wouldn’t be tempted to pay too much for the voting rights. (Neither share class currently trades at an attractive price / fair value; A shares are at 1.04 and C shares are only slightly less overvalued at 1.02.)

Mogharabi also points out that in terms of volatility, GOOGL appears to have been a bit more volatile than GOOG.

“Depending on the investment style and / or the time horizon, interested investors should also consider volatility,” he said.

Both classes of shares are also liquid in the same way: the average trading volume of A shares is 1.9 million, which is not much different from the average trading volume of C shares of 1.7 million. . If Alphabet B shares were available for purchase in the market, you would likely see much larger differences in price and trading volume than with GOOG and GOOGL.

The well-known case of Berkshire Hathaway Inc Sharing (BRK.A) compared to B shares (BRK.B) A good illustration of this is that A shares closed at $ 266,350 on August 4, while B shares closed at $ 177.04. The average trading volume of B shares is 3.2 million, while A shares are traded very little at just 337. According to 10-K, each Class A common share is entitled to one vote per share, while each Class B common share has voting rights equivalent to one ten-thousandth (1 / 10,000) of the voting rights of a Class A share.

Why do some shares have no voting rights?
Some investors are here for the trip, such as investors in Snap’s class A shares, which are non-voting. In Snap’s 10-K, it is explained that Snap co-founder and CEO Evan Spiegel and co-founder and CTO Robert Murphy together own such a large concentration of Class C common stock (which entitles the holder to 10 votes per share). that these two men hold approximately 88.5% of the voting rights of the outstanding share capital of Snap. Class A ordinary shares, those which investors can purchase under the symbol SNAP, do not have voting rights.

Some companies argue that the concentration of voting rights within the company protects it from “activist” investors. If the term “activist” evokes benefactors, this is not always the goal of activist shareholders. These powerful shareholders have high concentrations of voting rights; these are usually mutual funds, hedge funds, or large pension funds. While activist investors can spark a change for the better in corporate policy and encourage the development and adoption of best practices, they can also have short-term thinking – not concerned with the long term but with stocks that will increase the share price over the next few quarters. In many cases, such actions run counter to the company’s long-term goals of creating shareholder value. (For example, an activist investor focused only on the short term may vote “no” on a merger proposal, even though it has the potential to add shareholder value over the long term.)

Should I buy a non-voting share?
If you are considering buying a non-voting stock, be aware that you will not have any influence on the affairs of the company, such as the election of board members or the votes on mergers and acquisitions. But, of course, if you own shares in the company, you are still entitled to a portion of the profits (or losses) of the company, whether or not you have voting rights.

But even if you buy shares of a company that has voting rights, as an individual investor you probably will not have a sufficient concentration of voting power to influence the outcome of a vote. That’s why it’s important, whether or not you invest in a voting stock, to ensure that you have the utmost confidence in the team running the business. Business leaders should be good stewards of investor capital and they should be accustomed to making sound capital allocation decisions.

Morningstar equity analysts assign a corporate stewardship rating – exemplary, standard, or poor – based on an assessment of a firms’ investment strategy, current history and assessment of investments, financial leverage, dividend and share buyback policies, execution, executive compensation, etc. transactions between parties and accounting practices. Stewardship is judged on a prospective and absolute one-shareholder basis: companies are not judged against their peers within their industry, but against an ideal stewardship of shareholder capital.

Premium members can find a company’s corporate stewardship rating in the Morningstar Analysis section of a stock’s rating page.



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