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:
For this article I am looking at Greif, Inc. For American investors buying shares, there are two options for investing in Greif: Greif Class A common shares (GEF) and Greif Class B common shares (GEF.B). This article will investigate the differences in economic and voting rights between the two share classes as well as other factors. By doing this, we can draw some conclusions about the suitability of each share class for investors, and perhaps identify unique opportunities that this situation might present.
Company Profile and History
Greif, Inc.'s various segments manufacture and sell industrial packaging products worldwide. In addition, its Land Management segment engages in the harvest and regeneration of timber properties; and sale of timberland and special use land. The company was formerly known as Greif Bros. Corporation and changed its name to Greif, Inc. in 2001. Greif, Inc. was founded in 1877 and is headquartered in Delaware, Ohio. They initially went public under the name The Greif Bros. Cooperage Corporation in 1926. (Sources: Yahoo Finance and Company Website.)
Under the structure of the two share classes, Class A common shares get priority with regards to the first $.01 of dividends paid out each year. This right is cumulative. This means if the amount is not paid out for a year or more, it is still due to Class A common shares before other dividends can be paid. In this way, all claims to $.01 annual dividends by Class A shares must be satisfied before Class B common shares can receive any dividend payments in any given year.
In any year when the $.01 dividend for Class A common shares has been paid out, Class B common shares are entitled to the next $.005 (1/2 cent) of dividend payments. This right is non-cumulative meaning that if this dividend is not paid for a year, Class B common shares can't recoup the dividend in subsequent years the way that Class A common shares can.
After these first two requirements have been satisfied, any further dividend distributions are paid out in the proportion of 1:1.5 (1 cent to 1 ½ cents) to Class A common shares and Class B common shares, respectively.
In the event of an involuntary or voluntary liquidation or dissolution of the company, the Class A common shares are entitled to the first $.15625 (15 and 5/8 cents) per share in distributions. The Class B common shares are then entitled to the following distributions until equality in payout is reached, with any remaining value being split on a 1:1 basis between Class A and Class B common shares. (Information from Form 8-A12G, see link in "Voting Rights" section)
In Greif's dual-share class structure, all rights to vote and all voting power is vested exclusively in Class B common shares. The Class A common shares have no voting power, and aren't entitled to a notice of meetings of stockholders; nor are they entitled to vote on company directors. The lone exception to this is in the case that four quarterly cumulative dividends are not paid to the Class A common shares. In this instance each Class A common share will receive equal voting rights as that of Class B common shares until all past dividends are paid, and the dividend for the next quarter is both declared and the funds are set aside for payment. At this point Class A common shares will revert back to once again having no voting power. (Information from Form 8-A12G)
Both share classes of Greif, Inc. have listings on the NYSE. The Class A common shares trade with the ticker GEF, while the Class B common shares trade with the ticker GEF.B.
Share Price History
Using Yahoo Finance I pulled historical prices for GEF (Class A) and GEF.B (Class B) common shares. I used the closing price on the first trading day of the month from November 2003 through March 2013. This graph compares the price of the two stocks over the last 9+ years. This date range was chosen because Class B shares first began trading on October 7, 2003. (Both share class prices were adjusted for a 2007 2:1 stock-split)
There is no denying the fact that the two share classes trade in near lockstep. They have tracked each other's overall price movements very closely over their entire 9+ year trading history.
Here is another graph showing the % premium for GEF.B over GEF over the last 9+ years.
During this time frame, GEF.B has actually spent more time trading at a discount to GEF than it has trading at a premium. Additionally, the most extreme move has been to a discount.
Looking at the latest Form 10-Q filing, there are currently approximately 25.3 million and 22.1 million outstanding Class A and Class B common shares, respectively. With regards to Class A common shares, currently 74% of outstanding shares are held by insiders and 5% owners, with 82% of outstanding shares being classified as held by institutional and mutual fund owners (source: Yahoo Finance). With regards to Class B common shares, currently 88.5% of outstanding shares are held by the top 7 holders, 5 of which are individuals, with the other 2 non-individual holders being trusts (source: Form 14-A).
Class A common shares over the last 3 months have had an average trading volume of 182,545 shares daily. Class B common shares over the same 3 month span have had an average trading volume of 4,687 shares daily. This is an approximate 40:1 ratio of Class A common shares trading volume to Class B common shares trading volume on an average day. This lack of liquidity with regards to Class B common shares could make for exaggerated price moves in periods of market turmoil.
Review and Conclusions
Given what we know about the economic rights of the two shares, it would seem appropriate for Class B common shares to trade at close to a 50% premium to Class A common shares. This, because of their almost universal superior claim to dividends paid, and thus earnings and assets, at a near 1.5:1 ratio. There are only a few instances where Class A common shares have an equal or superior claim to dividends and earnings, or an equal or superior claim to assets of the company.
These are the instances where Class A common shares have a superior claim on dividends and earnings, or assets of the company than that of Class B common shares (all numbers calculated using most recent available data for number of shares outstanding):
- If less than $.01 of dividends per Class A common share is paid out in a given year, the amount that the dividend came short of $.01 per Class A common share would still accrue to the Class A common shares and need to be payable before any dividends could be paid to Class B common shares. (see below for means to calculate additional metrics)
- If at least $.01, but less than $.02 per Class A common share is being paid out in a given year. This would represent a nominal payout of between $253,000 ($.01 * 25.3 million Class A common shares outstanding) and approximately $948,000 ($.02 * [25.3 million Class A common shares outstanding + 22.1 million Class B common shares outstanding]). This would be between a .20% and a .75% payout ratio of the $126 million profit for 2012, and would represent an annual dividend yield (using the stock price as of 4/2/2013) of between .02% and .04% on the Class A common shares.
- If the company were to involuntary or voluntary liquidate or dissolve with a distributable value of less than approximately $7,406,250 ($.15625 * [25.3 million Class A common shares outstanding + 22.1 million Class B common shares outstanding]) the Class A common shares are entitled to the first approximately $3,953,125 ($.15625 [15 and 5/8 cents] per share) of available distributions. This would represent a yield of at the most .29% on investment (using the stock price as of 4/2/2013) in the Class A common shares.
In these instances Class A common shares have an equal claim on dividends and earnings, or assets of the company to that of Class B common shares (all numbers calculated using most recent available data for # of shares outstanding):
- If exactly $.02 per share of both Class A and Class B common shares is being paid out. This would represent a nominal payout of approximately $948,000 ($.02 * [25.3 million Class A common shares outstanding + 22.1 million Class B common shares outstanding]). This would be an approximate .75% payout ratio of the $126 million profit for 2012 and represent an annual .04% dividend yield (using the stock price as of 4/2/2013) on the Class A common shares.
- If the company were to involuntary or voluntary liquidate or dissolve, with a distributable value of equal to or more than $7,406,250 ($.15625 * [25.3 million Class A common shares outstanding + 22.1 million Class B common shares outstanding]). In this instance, the Class A common shares are entitled to an equal claim in any proceeds of the liquidation/dissolution as that of Class B common shares.
All of these instances have two things in common; first, none are in the best interests of the Class B common shareholders; second, with the exception of 2. from the second list, none would provide any meaningful value for Class A common shareholders. Coupled with the fact that Class B shareholders own 100% of the voting control within the company, 2. from the second list becomes extremely unlikely as well. The reason for this is that Class B shareholders would not voluntarily liquidate/dissolve the company where the distributable value of the company exceeded $7,406,250 (from above) as this would transfer value from the Class B common shares to the Class A common shares. With regards to an involuntary liquidation, it is not likely that the company would be forced into this with any substantial net asset value remaining. Given the concentrated voting power in the Class B shares, calculated control over these factors is all but a certainty.
With regards to all of the facts presented, it only stands to reason that for all practical considerations Class B common shares have a superior claim to dividends, earnings, and assets than Class A common shares at a near 1.5:1 ratio. Therefore, Class B common shares trading under the ticker GEF.B offer a much more compelling value than Class A common shares trading under the ticker GEF on a relative dollar-for-dollar cost basis.
In fact, as long as the premium remains under 50% for Class B common shares as compared to Class A common shares (and perhaps slightly lower than that allowing for a slight discount due to the extra liquidity risk associated with Class B common shares), one should consider owning GEF.B to be a preferable option to owning GEF. Given that the current premium for GEF.B over GEF sits right at about 7%, it appears that there is a significant opportunity for long-term investors already owning, or interested in buying shares of Greif to take advantage.
Do you agree with my analysis of these two share classes? Are there any issues/considerations I haven't covered that are germane to this investigation? Leave a comment below or a suggestion of any other similar share-class structures you would be interested in me investigating.