Seeking Alpha
Profile| Send Message|
( followers)  

Two share classes worth investigating

Ever wonder why some companies seem to have two listings, and two different prices on those listings?

In earlier articles I have investigated dual share class and dual listing structures for:

Royal Dutch Shell (NYSE:RDS.A) & (NYSE:RDS.B) - Article

BHP Billiton Ltd (NYSE:BHP) & BHP Billiton PLC (NYSE:BBL) - Article

Unilever NV (NYSE:UN) & Unilever PLC (NYSE:UL) - Article

For this article I will look at another company with multiple share listings, Carnival, and investigate possible causes for differences in share prices. First a little history on how Carnival's two share classes came to be.

The current dual listing company structure was created from a 2002 merger between the two largest cruise line operators at the time, Carnival Corp and P&O Princess. After the merger Carnival Corp (NYSE:CCL) kept its name and remained incorporated in Panama, and P&O Princess changed to Carnival PLC (NYSE:CUK) and remained incorporated in the United Kingdom. Here is an explanation of the resulting company structure from the Form 8-K (definition of Form 8-K) that was filed to announce the completion of the dual-listed structure:

"Under the dual listed company structure, the two Registrants are managed and operated as if they were a single economic enterprise, with identical boards of directors and a single senior executive management team, while remaining separate companies with separate stock exchange listings and index participations. The two Registrants will pursue a common set of business objectives established by the identical boards and single management team, that will evaluate these strategies and other operational decisions from the perspective of all shareholders."

Also more follow up on the equitable treatment of each share of stock in the same 8-K:

"All shares of the Common Stock shall have the same rights, powers, preferences and privileges and shall rank equally, share ratably and be identical in all respects as to all matters, including rights upon liquidation and distribution of the assets of the Corporation and in respect of rights to dividends and other distributions, when and as declared."

Listing

Both companies have share listings on the NYSE. Carnival Corp trades under the ticker CCL, while Carnival PLC trades under the ticker CUK. Carnival PLC also trades on the LSE (London Stock Exchange) interestingly enough using the ticker CCL.

Price Discrepancy

Using Yahoo Finance I pulled historical prices for CCL and CUK shares. I used the closing price on the first trading day of the month from April 2003 through March 2013. This graph compares the price of the two stocks over the last 10 years.

(click to enlarge)

There is no denying the fact that the two share classes trade in near lockstep. They have tracked each other's movements very closely over their entire 10-year trading history.

Here is another graph showing the percent premium for CUK over CCL over the last 10 years.

(click to enlarge)

The two share classes have had a tumultuous premium/discount relationship over the last 10 years. Starting off at a 10% discount shortly after the merger, CUK quickly moved to a 5% premium over CCL within a year. This premium held fairly steady, reaching as high as 8% at one time, until the middle of 2006 where it dipped negative for a short period, and then again in October of the same year. From there CUK regained its 5% premium only to lose it in the middle of 2007 and have it turned into more than a 12% discount in September 2008. In early 2009 CUK regained its premium of about 5%, but then moved back near parity with CCL late in 2010. After regaining a 5% premium in April 2011, CUK has given up its premium on multiple occasions before moving back to a premium at the moment.

Here are the two graphs appropriately scaled and overlaid first using the price axis, and second on using the % premium/(discount) axis.

(click to enlarge)

(click to enlarge)

Looking at this relationship reveals that the % premium CUK fetches over CCL has been very well correlated with both shares' price performance over the last 10 years. It appears that the premium that CUK fetches expands when share prices in each are rising, and disappears and turns into a discount when share prices in each are falling. At times, it appears to be a leading indicator, as the changing price discount/trend got ahead of the share prices on the way to the late 2008/early 2009 lows, and then reversed course and led the shares back higher.

Shareholder Base

Looking at the number of shares outstanding of each holding company at the end of 2012, there were 649 million shares of Carnival Corp and 212 million shares of Carnival PLC. With regards to Carnival PLC, there is about a 7:1 ratio for shares traded on the LSE to NYSE, showing a heavy tilt towards UK-ownership for Carnival PLC. All Carnival Corp shares are listed on the NYSE, which means Carnival Corp is most likely owned by US investors.

In the case of broad market changes (due to economic shocks, wars, natural disasters, etc.) affecting either the British market or the US market, we could expect the prices of the CUK (linked to LSE-traded stock) and CCL to be affected along with their respective home markets.

Currency Effects

Since CCL trades on the NYSE in USD, and CUK is an ADR for a stock that trades on the LSE in GBP, the relationship of the premium/discount between the two could be affected by sharp changes in USD-GBP exchange rates. There is no basis for this to have a prolonged distortion on the price relationship, however.

Taxation

From the perspective of a US investor, both companies appear to have equal tax consequences of ownership, with CUK having no UK withholding tax due to a tax treaty with the US.

Share Class

CCL

CUK

Dividend Tax Rates

Foreign Tax Withheld

0%

0%

Normal Applicable US Rate

0-23.8%

0-23.8%

Capital Gains Tax Rates

Foreign Tax Withheld

N/A

N/A

Normal Applicable US Rate

0-23.8%

0-23.8%

From the perspective of an international investor, the only difference I can see is for those living in "tax-friendly" locations. I would expect that there would be advantages to owning CCL in this instance. Carnival Corp is incorporated in Panama for a variety of reasons. Among them is that by incorporating in Panama, additional layers of regulation and taxation are not added on top of what is already taxed and regulated in each country that Carnival operates in. So while living in a tax haven and owning shares of Carnival PLC (NYSE: CUK, LSE: CCL) would result in withholding taxes being levied on your dividends, this would not be the case with Carnival Corp.

I doubt that there are enough investors in this particular situation looking to invest in CCL to affect its relationship to CUK in any meaningful way, however. Though, when considering that the investable market for tax-haven friendly stocks is much smaller than the overall investable market, it seems like a possibility worth considering. As this would be impossible to quantify, and I am unable to procure enough evidence either way, this will remain just an idea.

Current Valuation

Here is a table showing current share prices, P/E and dividend yield as of close on April 1, 2013. (share price and P/E from Yahoo Finance, dividend yield calculated using $1 annual dividend divided by respective share price)

Share Class

CCL

CUK

Share Price

33.96

34.73

P/E

17.91

18.32

Dividend Yield

2.94%

2.88%

Bringing it all together

In earlier investigations of dual listed companies and dual share classes, there were strong cases to be made for why there would be differences in prices among different share classes. In the case of Carnival Corp and Carnival PLC there are lots of potential inputs that could affect the relative prices of the two share classes over short time-frames, but no concrete reasons for one to trade higher than the other for any sustained period of time. Since taxation for each share class would be the same for most investors, and both share classes hold equal economic right within Carnival as a whole, I feel the best course of action for ownership would be to own the share class currently receiving a discount.

What do you think? Is there something else I missed that would account for the difference in price between the two share classes? Does this company have a need to have dual-share classes at all? Leave a comment with your thoughts, or suggestions about other dual-share classes worth looking at.

Note: This article was not written to evaluate the business prospects of Carnival, nor its return prospects. Instead, this article was solely written to provide information on the dual-share class structure Carnival employs and remove investor uncertainty surrounding dual-share classes in general.

Source: Investigating Carnival's Dual Share Classes